Australia considered pausing rate tightening cycle in December

AUSTRALIA’S central bank considered pausing its policy tightening cycle this month but decided against it as incoming economic data didn’t yet warrant a change of stance, according to minutes of the Dec 6 meeting.

The Reserve Bank of Australia’s (RBA) board raised interest rates by a quarter percentage point to 3.1 per cent two weeks ago after considering three options – 25 basis points, 50 or a pause, the minutes released on Tuesday (Dec 20) in Sydney showed.

This is the first time during the RBA’s eight-month tightening cycle that board members put the case for no change on the table. The discussions come as a majority of economists see two more quarter-point hikes in 2023, taking the cash rate to 3.6 per cent.

Board members noted, in deciding to keep tightening, that the RBA’s most recent forecasts indicated that inflation was expected to take several years to return to the 2-3 per cent target, even with further increases in the cash rate, the minutes showed.

“Incoming information had not warranted a reassessment of that broad outlook,” the RBA said. “Moreover, members noted that no other central bank had yet paused.”

“Members also noted the importance of acting consistently, and that shifting to either larger increases or pausing at this point with no clear impetus from the incoming data would create uncertainty about the board’s reaction function,” the minutes showed.

The RBA reiterated that it expects to increase rates further while adding that they “are not on a pre-set path”. It repeated that the size and timing of future hikes will be determined by incoming data and the outlook for inflation and employment. That provides the board with maximum flexibility to manoeuvre in the current cycle.

The minutes showed that members saw “considerable uncertainty” for the economy’s outlook with the timing and extent of a likely slowdown in household spending still unknown. The outlook for global growth was also darkening while it wasn’t yet clear if Australia will avoid the price-wage spiral seen elsewhere around the globe.

“Recognising this uncertainty, members noted that a range of options for the cash rate could be considered again at upcoming meetings in 2023,” the minutes showed.

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The board didn’t rule out returning to half-point increases if needed or leaving the cash rate unchanged for a period to assess incoming data. The RBA reiterated that the policy lag in the current cycle was likely to be longer than in past episodes as a large number of households are still on fixed rates and unaffected by the rapid tightening to date.

“The board’s priority is to re-establish low inflation,” the minutes showed. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

The RBA has raised rates by 3 percentage points since May as it grapples with the fastest inflation in more than three decades. The central bank was, however, the first to break with the global trend of outsized moves, when it downshifted to quarter-point hikes in October.

The central bank’s forecasts show consumer-price growth will peak at 8 per cent this quarter. The bank targets 2-3 per cent over time. BLOOMBERG