The RBA kept the cash rate on hold at 4.1% for the fourth successive month in October, citing 'a more sustainable balance between supply and demand in the economy', but also ongoing concerns about inflationary pressures and a heightened level of uncertainty surrounding the economic outlook.
The recent uptick in inflation, from 4.9% annually in July to 5.5% in August, wasn’t enough to prompt a further rate hike this month.
With volatile measures stripped out, annual growth in the monthly CPI continued to ease to 5.3% (down from 5.6%).
However, clearly, inflation remains high on the RBA’s risk radar.
Higher fuel and energy prices, alongside persistently high services and rental inflation, have the potential to trigger another rate hike later this year.
Logically, the RBA will be waiting to see September quarter inflation data, released the week ahead of the RBA’s November meeting.
With this in mind, the November meeting will be closely watched.
The RBA is also likely to be keeping a close eye on the housing sector.
Rental pressures are front and centre in the inflation numbers, however, the annual change in CoreLogic’s measure of market rents has been slowing since October last year.
CPI rents tend to lag market rents, implying CPI rental growth could be close to peaking.
Importantly, the upswing in Australian housing values has lost some steam over the past quarter, with a 2.2% rise in CoreLogic’s national Home Value Index compared with a 3% rise through the June quarter.
Although the RBA doesn’t directly target asset prices in their decisions, the ongoing rise in housing values across most regions of Australia could be a concern for the RBA.
Higher housing values have the potential to keep inflation higher for longer due to the flow from the wealth effect; if homeowners feel wealthier they may be inclined to spend more.
Although we have seen the cash rate holding firm for four months now, there is little sign of a lift in consumer spirits.
Both the weekly and monthly measures of consumer sentiment are holding deeply in pessimistic territory.
With households continuing to face the cost of living pressures, alongside the spectre of another rate hike, it’s unlikely consumer attitudes will show a material lift any time soon.
With housing market activity and sentiment highly correlated, it’s unlikely residential purchasing activity will show a material rise until some certainty returns to the economy.
