RBA ready to take a break or get back to overkill hikes

SYDNEY: Australia’s central bank is ready to suspend its tightening cycle or return to larger interest rate hikes if the economy demands it, according to the minutes of the Nov. 1 policy meeting when it raised the benchmark by a quarter of a percentage point.

The Reserve Bank of Australia’s (RBA) board considered two options – 25 basis points or 50 – at the meeting, deciding the former was stronger given the full effect of its rapid increases since May.

“The case for a 25 basis point increase was largely based on the fact that the cash rate had been significantly increased in a short time and that there were lags,” the minutes showed. published yesterday.

“Members also discussed the value of the board acting consistently,” after pivoting to smaller increases a month prior.

The RBA reiterated that rates “are not on a predefined path” and that the size and timing of future hikes will be determined by incoming data and the outlook for inflation and employment. This gives the board maximum flexibility to maneuver in the current cycle. “The board remains steadfast in its determination to bring inflation back to target and will do what is necessary to achieve that outcome,” the minutes read.

The RBA has raised rates by 2.75 percentage points in seven months as it grapples with the fastest inflation in more than three decades. The central bank was the first to break the global trend of outsized moves, however, when it moved to quarter-point hikes in the past two meetings.

This heralds another shift, with Governor Philip Lowe expected to extend the tightening cycle with smaller increments over a longer period to reinforce the RBA’s commitment to bringing inflation back to its 2-3% target. Consumer price growth is expected to peak at 8% at the end of this year.

The RBA has acknowledged that soaring borrowing costs have calmed the country’s booming housing market, with demand for mortgages also falling.

Members pointed out that given the cumulative increase in rates ahead of the Nov. 1 meeting, expected mortgage payments as a share of household income are expected to rise to their highest level since 2010.

Still, the central bank reiterated that further rate hikes would likely be needed in the period ahead as inflation was “too high”. A risk to the medium-term inflation outlook was the possibility of a price-wage spiral, leading to more persistent inflationary pressures.

Economists and financial markets expect the RBA to hike rates another quarter point at next month’s meeting, taking the cash rate to 3.1%. —Bloomberg

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