Why did the RBA raise rates two weeks ago? Meeting minutes reveal inflation risks have become reality and the cost of waiting is too high.

Noted that the RBA raised its key interest rate two weeks ago, citing that upside inflation risks were becoming reality and the cost of waiting could be high; it also added that the outlook will be heavily influenced by the ongoing conflict in the Middle East. In the minutes of its September meeting released on Tuesday, the bank said: "Members discussed the challenge of judging how large the upside risks to inflation were, or could become." It had previously raised the key interest rate to 4.6%. The board will take the necessary actions to meet its mandate, "including raising the cash rate target further if necessary." When discussing the rate hike, the central bank board also noted that although Australia tightened policy earlier than other central banks, the future path of Australian interest rates relative to other countries will also affect the exchange rate and, in turn, feed into domestic inflation. The RBA has carried out the most aggressive tightening campaign among central banks in developed economies this year, raising borrowing costs by 1 percentage point in an attempt to curb stubbornly high inflation. Since late last year, Australia has faced renewed price pressures, and it had already begun raising the cash rate even before the U.S.-Israeli strikes on Iran triggered a global energy shock. The RBA is the most hawkish central bank in the developed world Traders expect about a one-in-three chance of an RBA rate hike in November, rising to slightly above 50% by December, with the probability increasing further next year those expectations were formed before the minutes were released. The RBA listed three key reasons for last month's decision to raise rates: 1) The strongest point is that several upside risks identified in the bank's August economic forecast update have materialized or are accumulating; 2) Responding to cost pressures in a timely manner would best balance the employment and inflation objectives. The board acknowledged that "waiting for further confirmation of the inflation outlook could be costly"; 3) The current cash rate may not be sufficient to restore balance to the economy within a reasonable timeframe. If the signal that "the global neutral rate may be rising" holds true, it would mean that the 4.35% rate level is less restrictive than it was two years ago. Since the meeting, the Middle East conflict has risked further expansion a wave of drone and missile attacks targeting Saudi Arabia has increased pressure on the United States to step up efforts to help its close ally strike Iran-backed Houthi forces in Yemen. This has injected new momentum into oil prices and inflation pressures. The RBA acknowledged that the trade-off between inflation and full employment has worsened, while insisting that its goal remains to bring CPI back to the 2%3% target range while preserving as much existing employment growth as possible. The RBA said: "However, executing this strategy in an environment of more persistent adverse supply shocks will require accepting slower growth in demand and employment than would otherwise have been the case." "Members added that the board's task is to stabilize medium-term inflation at the target, even if the persistence of medium-term inflation is driven in part by factors beyond the influence of monetary policy." In a brief explanation of last month's "hold" rationale, the RBA noted that it was mainly based on the possibility that downside risks to employment and activity could be greater than expected. One reason may be that "members judged that the impact of falling housing prices on household spending could be larger than assumed." Australia's housing market downturn is deepening, with national home prices in September falling back to levels recorded a year earlier due to weak buyer demand. As households face high borrowing costs, rising oil prices and persistently strong inflation, consumer confidence is also declining.