Reserve Bank of Australia takes out insurance policy for inflation goals with November rate hike to 4.35pc

A slower than expected decline in the inflation rate and a lower unemployment peak are largely behind the Reserve Bank of Australia’s latest interest rate hike, described by some economists as an insurance policy for its inflation goals.

But the bank’s increase to 4.35 per cent risks imperilling some businesses, analysts say, questioning the efficacy of the rise. Retailers are increasingly concerned about the impact of a dire Christmas trading period.

The RBA now expects inflation to be 3.5 per cent at the end of next year, rather than 3.25 per cent, and the unemployment rate to rise to 4.25 per cent, rather than 4.5 per cent, with further detail to come in Friday’s quarterly forecasts.

Governor Michele Bullock said the risk of inflation staying higher for longer had increased, and though economic growth was below trend, it had been stronger than expected in the first half of the year.

“The board is increasingly concerned that inflation will not decline on the trajectory it is aiming for, and so it has decided to take out more insurance to achieve the desired result,” Westpac chief economist Luci Ellis, a former RBA assistant governor, said.

Others noted a change in the RBA’s language around future rate hikes from “whether further tightening is required” to “some further tightening ... may be required”, suggesting this was a softening in the RBA’s approach.

Dr Ellis said it appeared the board was hoping to not need to hike rates again but “being very willing to do so if things change” and a February increase was more likely than December, should one be needed.

“Given the upgraded inflation forecasts and lower unemployment forecast, though, they are likely to have even less tolerance for upside surprises,” she said.

HSBC chief economist Paul Bloxham said the RBA now appeared to be in “calibration mode” and there was an increased risk of rates staying higher for longer, while EY chief economist Cherelle Murphy said the RBA would be “on guard for some time yet” given the surprises to inflation and economic activity.

Betashares chief economist David Bassanese said the hike was “an unavoidable consequence of the fact we have only one blunt instrument to fight inflation”.

CreditorWatch chief economist Anneke Thompson said the cash rate increase would have little influence on prices of rents, insurance and utilities, which are driving the persistent inflation rate.

“This rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors,” she said.

“Demand in these sectors has already contracted.”

Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the hike would add more stress to businesses, and managing rising costs and keeping pricing competitive was a “delicate balance”.

Australian Retailers Association chief executive Paul Zahra — who had urged the RBA to keep rates on hold — said the decision had dampened the industry’s cautious optimism ahead of Christmas.

“Continued interest rate hikes have the dual effect of reducing customer spending whilst also increasing business costs – during a time where the industry is already under enormous pressure,” he said.

AMP chief economist Shane Oliver said the decision was likely to have been close, and he remained concerned the RBA had hiked more than necessary, increasing the prospects of a recession.