Powered by MOMENTUM MEDIA
investor daily logo

RBA addresses rate gap criticism, says keeping ‘public attention’ on inflation target is key

  •  
  •  
4 minute read

The RBA’s October rate decision was influenced partly by its resolve to keep public attention focused for a longer period on its goal to return inflation to target.

The minutes of the Reserve Bank’s (RBA) monetary policy meeting published on Wednesday have indicated the presence of an extensive discussion about whether the size of the rate hike should be 25 or 50 basis points (bps).

In a decision that has been referred to as “finely balanced”, the RBA opted for a 25 bp hike to, among other things, assess the effects of the significant increases to date and the evolving economic outlook.

“A smaller increase than that agreed at preceding meetings was warranted given that the cash rate had been increased substantially in a short period of time and the full effect of that increase lay ahead,” the central bank said.  

==
==

“At the same time, the board agreed on the importance of returning inflation to target and the need to establish a more sustainable balance of demand and supply in the Australian economy. This was likely to require further increases in interest rates over the period ahead.”

The RBA also acknowledged that by “drawing out policy adjustments” it would “help to keep public attention focused for a longer period on the board’s resolve to return inflation target”.

Referencing recent debate — sparked mostly by Treasurer Jim Chalmers — around the widening gap between the US Fed fund rate and the RBA cash rate, the central bank acknowledged that while some other central banks had been “increasing policy by larger increments”, policymaking bodies in these central banks “met less frequently” than the RBA board.

Last week, Treasurer Jim Chalmers warned that the widening gap between the US Fed rate and the local cash rate was exerting immense downward pressure on the Australian dollar which, he said, carried further implications for inflation.

“I'm not preempting decisions by the US Fed or the Australian Reserve Bank but the mechanics of it are pretty clear,” Mr Chalmers said.

“When there's a big and widening gap between US interest rates and Australian interest rates, that risks putting downward pressure on our currency, that makes imports more expensive,” he added.

However, speaking to InvestorDaily, AMP’s chief economist, Dr Shane Oliver, called the Treasurer's comments “exaggerated”.

He reminded that 40 years ago, “we floated the Australian dollar so the RBA can have an independent monetary policy”.

“Rising rates to match the Fed just to keep the Australian dollar up would defeat the purpose of floating the Australian dollar in the first place.”

Last month, the Fed raised its benchmark interest rate by 0.75 percentage points, bringing the Fed rate to between 3 and 3.25 per cent. Despite implementing three supersized rate hikes in a row, the Fed said more increases are to come and predicted rates would reach 4.4 per cent by the end of the year.

In Australia, the Reserve Bank has embarked on a steep hiking cycle but to a lesser extent than the Fed, bringing the cash rate from 0.1 per cent to 2.6 per cent since May. And although the RBA is expected to keep hiking, Dr Oliver, expects it to finish up the year at 2.85 per cent.

RBA addresses rate gap criticism, says keeping ‘public attention’ on inflation target is key

The RBA’s October rate decision was influenced partly by its resolve to keep public attention focused for a longer period on its goal to return inflation to target.

investordaily image
investordaily image
ID logo
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

Comments powered by CComment