The Reserve Bank of Australia has left the cash rate unchanged at 4.35%, giving mortgage holders another temporary reprieve after three increases earlier this year. However, the message accompanying the decision was hardly comforting. Inflation remains too high, the risks are still tilted to the upside and the Board has made it clear that it will do what is necessary to return inflation sustainably to target.
Financial markets are currently pricing in around a 50% chance of another rate increase before the end of the year. The RBA expects headline inflation to remain elevated in the near term, with inflation only gradually returning to the midpoint of its 2% to 3% target range by early 2028. That suggests interest rates may remain higher for considerably longer than many borrowers had hoped.
The Bank believes the inflationary impact of the US-Iran conflict has so far been less severe than initially feared. Australian households may view that assessment a little differently. While the conflict may not have produced the broad inflationary shock once anticipated, it has certainly been visible at the petrol bowser, where prices remain volatile and, in many areas, stubbornly high.
Fuel prices do more than increase the cost of filling a family car. Higher diesel and petrol prices flow into freight, agriculture, construction, deliveries and almost every part of the retail supply chain. Businesses eventually face the choice of absorbing those costs through smaller margins or passing them on to customers. Either way, the economic impact spreads well beyond the service station.
The recent restoration of the full fuel excise has added another layer of pressure. The ACCC reported that average retail petrol and diesel prices increased across capital cities and most regional areas following the excise change. For households already managing larger mortgage repayments, insurance increases, higher grocery bills and more expensive utilities, the difference between official inflation and the lived cost of living can feel substantial.
This leaves the RBA in an uncomfortable position. Raising rates cannot increase global oil production, reopen disrupted shipping routes or directly reduce the wholesale price of fuel. What higher rates can do is suppress demand elsewhere in the economy, making it more difficult for businesses to pass higher costs through to consumers. Unfortunately, that means households can be squeezed twice, first through higher essential costs and then through more expensive debt.
Gold, meanwhile, surrendered some of its recent gains overnight as investors took profits following a remarkably strong week. Spot gold fell more than 1% after briefly reaching a two-month high, with the (AU6371) US$4,500 level emerging as an area of resistance. Even after the retreat, gold remains substantially stronger than it was a week ago and continues to trade comfortably above its 50-day moving average.
That technical position keeps the recent recovery intact. A single softer session after such a rapid rise is not necessarily a sign that momentum has disappeared, particularly when profit-taking is to be expected after a strong run. The more important question is whether gold can consolidate above its 50-day moving average and build another attempt its current resistance level.
With Australian inflation still elevated, interest rates potentially remaining higher for longer and geopolitical risks continuing to affect global energy markets, the underlying environment remains supportive of demand for defensive assets. Gold may have lost a little shine overnight, but it has still enjoyed a beautiful week and the broader recovery remains firmly in play.
Indicators
Weekly projection NEUTRAL, Monthly projection Neutral
Weekly technical indicators chart.
Learn more about technical indicators and what they mean.
| Indicator | Value |
|---|---|
| RSI(14) | Neutral |
| STOCH(9,6) | Sell |
| STOCHRSI(14) | Overbought |
| MACD(12,26) | Sell |
| ADX(14) | Buy |
| Williams %R | Neutral |
| CCI(14) | Buy |
| ATR(14) | Less Volatility |
| Highs/Lows(14) | Buy |
| Ultimate Oscillator | Buy |
| ROC | Sell |
| Bull/Bear Power(13) | Buy |
The RBA controls the cash rate, but it has no direct control over the global price of oil. Australian fuel prices are influenced by international crude and refined fuel markets, shipping costs, the Australian dollar, taxes, local competition and the normal petrol pricing cycle.
When fuel prices rise because of war or disrupted supply, increasing interest rates cannot produce more oil or make shipping safer. Instead, the RBA attempts to prevent the initial fuel-price shock from spreading into broader inflation. Higher rates reduce household spending and business investment, making it harder for companies to continually increase prices without losing customers.
This is known as limiting the βsecond-round effectsβ of inflation. The RBA is less concerned with one temporary rise in petrol prices than it is with fuel costs feeding into transport, groceries, wages and inflation expectations across the economy.
The difficulty is that petrol is an essential expense for many Australians, particularly those living outside major metropolitan areas. Households cannot always reduce their fuel consumption simply because interest rates have increased. As a result, monetary policy can eventually reduce broader demand, but it may do little to relieve the immediate cost-of-living pressure felt at the bowser.
