Australia central bank judged rate hike was needed to anchor inflation expectations
AUSTRALIA’S central bank was concerned that inflation expectations could become un-moored if it did not raise interest rates this month, outweighing arguments for another pause in policy.
Minutes of its Nov 7 Board meeting released on Tuesday, showed the Reserve Bank of Australia (RBA) feared that even a modest further increase in inflation expectations could make it much more painful to bring inflation under control.
“Members noted growing signs of a mindset among businesses that any cost increases could be passed on to consumers,” the minutes showed.
“They agreed there was a risk of inflation expectations increasing if the Board left the cash rate unchanged at this meeting.”
As a result, the central bank ended four months of steady policy and raised its cash rate a quarter point to a 12-year high of 4.35 per cent.
Markets are pricing only a 5 per cent chance it will hike again in December, but imply around a 40 per cent risk it might move once more in the new year.
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The Board did see a “credible case” for not lifting rates at the meeting, including a slowing economy and geopolitical uncertainties such as tensions in the Middle East.
“Members agreed that whether further tightening of monetary policy is required to ensure inflation returns to target in a reasonable time frame would depend on how the incoming data alter the economic outlook,” the minutes showed.
Consumer price inflation ran at an annual 5.6 per cent in the third quarter, well above the RBA’s target range of 2-3 per cent, and was not expected to slow to 3 per cent until the end of 2025.
The Board noted service inflation was proving particularly persistent and suggested domestic demand was still running ahead of supply.
Population growth had surged on the back of strong migration and overseas student entries, adding to demand while also providing a welcome supply of new workers.
A resurgence in home prices in recent months was boosting household wealth and suggested financial conditions were “not especially restrictive”, the minutes showed.
The Board also noted that the RBA’s own forecasts for a slowdown in inflation had been predicated on one or two more increases in rates. REUTERS
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