Powered by MOMENTUM MEDIA
investor daily logo

RBA warns further hikes may be needed to extinguish inflation threat

  •  
  •  
4 minute read

The central bank has released the minutes of its latest board meeting, outlining the reasoning behind its May rate hike.

The Reserve Bank of Australia (RBA) has indicated that arguments were “finely balanced” both for and against a rate hike in May, but that eventually its resolve to ensure that inflation expectations remain anchored led the bank to hike for the 11th time in 12 months.

In its May meeting minutes published on Tuesday, the RBA confirmed that its board considered both keeping the cash rate unchanged and hiking by 25 basis points (bps).

The bank eventually decided to lift the official cash rate by 25 bps to 3.85 per cent.

Disclosing the arguments supporting a rate hold, the bank noted that the board considered the fact that inflation had already reached its peak and was showing signs of slowing.

“They considered the possibility that inflation could return to the centre of the inflation target band earlier than forecast if there was a reversal of some of the significant increase in goods prices recorded over preceding years,” the RBA said.

Additionally, they observed that the outlook for consumption appeared to be “weak” with consumption per capita not expected to rise over the coming year.

The board members also acknowledged that the lags associated with monetary policy and the extent of policy tightening handed down since May last year had resulted in “additional uncertainty around the outlook for the economy”.

“Given this, there was a case to continue to hold the cash rate steady in order to gather additional information,” the RBA said.

However, these arguments were weighed up against the fact that inflation is not expected to reach the top of the RBA’s target band until mid-2025.

“Members noted that, although this was consistent with the bank’s mandate and objectives, it left little room for upside surprises to inflation given that inflation would have been above the target for around four years by that time,” the central bank said.

In terms of the upside risks for inflation, board members pointed to a potential persistence in services price inflation, strong population growth and low rental vacancy rates driving higher rents, weak productivity growth boosting unit labour costs and a shift in inflation expectations.

Furthermore, the RBA board also discussed key economic data released since its previous board meeting before coming to the decision to hike in May.

“They particularly noted the strong growth in employment in March, the high rate of services price inflation in the March quarter CPI, further evidence of persistent services sector inflation abroad, and some easing in the stresses in global banking markets,” the RBA said.

“In weighing up the two options, members recognised that the arguments were finely balanced but judged it was appropriate to increase interest rates at this meeting.”

The board reaffirmed its determination to do what is necessary to bring inflation back to target, while noting that it is “still seeking to traverse the narrow path”.

“Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve,” the central bank said.

Following the release of the minutes, Westpac maintained that the RBA would pause at the June meeting. However, chief economist Bill Evans warned that the case for further near-term interest rate increases could not be dismissed.

“The concerns the board has around the risks to its inflation target are understandable but so are the signals around the sharp slowdown in spending and the likely feedback this will have on inflation and labour markets,” he said.

“As the board has outlined, the decision in May was ‘finely balanced’, therefore given the relentless frequency of board meetings, the case for a pause in June is respectable.”

Unless this week’s wages and labour market data “shocks” the RBA, Mr Evans argued that the next “live” meeting should be in August.

“As was the case in May, the arguments in August will again be ‘finely balanced’ although our forecasts point to an ‘on hold’ decision,” he added.

Meanwhile, ANZ head of Australian economics Adam Boyton said that the RBA’s use of the plural “increases” raised the prospect that rates may rise higher or earlier than it expects

“We see the risks around our expectation of one final 25 bp rate hike in August being that the RBA hikes more and/or sooner than we anticipate. Easing remains some considerable time off,” he said.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.