The RBA says it has "no pre-set path" when it comes to rate rises
The Reserve Bank board says it expects to keep hiking rates to tame runaway inflation, but appears to be preparing to slow the pace of its policy tightening, according to newly released minutes.
On Aug. 2, the RBA enacted a third straight rate hike of half a percentage point, bringing it to 1.85%, up from a record-low 0.1% as recently as April.
“Given high inflation, the resilient economy and the tight labour market, and taking into account the risks, members agreed it was appropriate to continue the process of normalising monetary conditions,” the minutes from the Aug. 3 board meeting said, as reported by The Australian.
While in previous meetings the board had debated whether to raise the cash rate by 0.25 or 0.5 percentage points, the August minutes reflected no such deliberation – simply a statement that the board “decided to increase the cash rate by a further 50 basis points.”
The RBA board said that global developments like COVID-19 and the war in Ukraine “explained much” of the skyrocketing inflation rate, but “domestic factors were increasingly playing a role.”
“There were widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy,” the minutes said. “The increase in interest rates in recent months has been required to bring inflation back to target by ensuring that inflation expectations remain anchored and establishing a more sustainable balance of demand and supply in the Australian economy.”
Gareth Aird, head of Australian economics for Commonwealth Bank, told The Australian it was important that the minutes for the latest meeting removed a previous statement that interest rates were “very low for an economy with a tight labour market and facing a period of higher inflation.”
“It does not preclude further tightening,” Aird said. “But it implies the board is open to slowing down the pace of tightening and indeed pausing in their cycle in the not-too-distant future.”
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Aird said he expected interest rates to peak at 2.6% later this year.
The minutes said that the RBA board was “not on a pre-set path” when it came to policy tightening.
“It is seeking to do this [tighten policy] in a way that keeps the economy on an even keel,” the minutes said. “The path to achieve this balance is a narrow one and subject to considerable uncertainty.”
The minutes said that the size and timing of future rate hikes “will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market, including the risks to the outlook.”
Aird said he still expected a further 0.5-percentage-point hike in September, “but this is certainly not a done deal.”
Westpac chief economist Bill Evans predicted that the RBA would slow the pace of rate hikes to 0.25 percentage points by its October meeting. However, Evans expected no pause in monthly rate hikes (excluding the January break) until February, at which point the cash rate would be 3.35%, The Australian reported.
Evans said the latest minutes indicated that the central bank believed households would be resilient to rate hikes this year.
“Growth in consumption was expected to remain strong over the second half of the year reflecting strong labour income, still high savings rates and strengthened household balance sheets,” the minutes said.
