Australia appears to be on track to beat inflation in tune with the central bank's preferred timeline but surging fuel prices and a struggling Chinese economy have put its board on high alert.
The minutes from the Reserve Bank of Australia's September 5 meeting on monetary policy suggest the board is growing increasingly confident it can get inflation back down.
The RBA expects still-high inflation to sink back within its preferred two-to-three per cent target range by late-2025 while "employment continues to grow".
A convincing slowdown in inflation, easing labour shortages and a weakening household sector fed into the case for keeping interest rates on hold this month.
But the board discussed the possibility of another hike in September and the minutes, released on Tuesday, show it kept the possibility of more tightening alive.
The bar for more rate increases is getting higher, with incoming data needing to prove inflation is "more persistent than expected".
Petrol prices were flagged as a possible risk factor, given costs at the pump can strongly influence the public perception of cost of living pressures.
Fuel prices have been marching upward due to oil supply cuts and a weakening Australian dollar.
CommSec economists Craig James and Ryan Felsman said high petrol prices were "a fly in the ointment for the RBA".
"The bank can't do much about higher fuel prices but it notes the key influence it has on inflation expectations," they wrote in a note.
Inflation expectations are fortunately heading in the right direction, hitting their lowest point in 19 months as measured by ANZ and Roy Morgan's weekly consumer confidence survey.
Other threats to bringing inflation down included in the September minutes were a failure to kickstart productivity growth and persistently high service inflation.
"Members observed that, were inflation to remain above target for an even longer period, this could cause inflation expectations to move higher, which would be likely to require an even larger increase in interest rates in the future," the minutes said.
"Such an outcome would be costly for the economy."
The central bank board was also alert to the risk of the economy slowing by more than forecast due to a weaker-than-expected consumer sector and a troubled Chinese economy.
At this stage, these emerging developments are yet to throw the RBA off its "narrow path".
Compare the Market economic director David Koch said Australia's central bank was approaching a crossroads.
The labour market remained tight, which would add to the case of more tightening, but the consumer sector was "falling off a cliff", with many households running down their savings built up during the pandemic.
Mr Koch said the RBA was clearly mindful of the lag effect of interest rate increases and was trying to avoid a sharp recession.
"Though if you take out population growth, we've had two consecutive quarters of negative economic growth and it's just record migration that's keeping the figures in the positive," he told AAP.
Mr Koch said the RBA was likely to stay on hold in October but one more hike before Christmas was still possible.