Australia central bank considered hiking again in December, paused for more data

AUSTRALIA’S central bank considered hiking interest rates for a second straight month in December, but decided there were enough encouraging signs on inflation to pause for more data.

Minutes of its Dec 5 Board meeting on Tuesday (Dec 19) showed the Reserve Bank of Australia (RBA) held the cash rate steady at 4.35 per cent as data over the prior month did not radically change the economic outlook, and there was a risk unemployment could rise faster than forecast.

Members now see “encouraging signs” of progress in inflation towards the bank’s target band of 2 to 3 per cent, and this needed to continue. They also noted an accelerating pace of disinflation overseas, which could be emulated in Australia.

“Members agreed there was sufficient value in waiting for further data to assess how the balance of risks was evolving and how best to balance these risks when setting policy,” the minutes showed.

Whether further tightening would be required would depend on data and the evolving risks, it added.

For December, the board agreed the risk it takes longer than expected to return inflation to target was balanced by the risk that aggregate demand slowed more quickly than expected.

Consumer price inflation ran at 5.4 per cent in the third quarter, down from a peak near 8 per cent but still far above the RBA’s target range of 2 to 3 per cent.

The central bank had in November hiked rates by a quarter point amid worries inflation expectations could become un-moored. It has jacked up interest rates by a whopping 425 basis points since May last year.

Markets have since moved to price out any further hikes, in part due to a recent dovish turn from the US Federal Reserve.

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Futures imply just a 5 per cent chance of a rate rise at the next RBA meeting in February, and two quarter-point cuts by the end of next year.

The Board did note inflation was expected to be above target until late 2025, and then only slow to the top of the 2 to 3 per cent range rather than the midpoint.

Australia’s economy barely grew in the third quarter as exports flagged and households cut back spending, suggesting rate hikes were working to restrain demand. Jobless rate also hit a 1½ year high of 3.9 per cent in November.

Members also agreed the RBA’s current approach of holding government bonds to maturity remained appropriate, but agreed to keep under active consideration the possibility of selling the bonds earlier.

The board discussed whether it would to best to sell the bonds to the market or directly to the government, and saw several benefits of choosing the latter course. REUTERS