Australia’s central bank switch to slower hikes ‘finely balanced’ as uncertainty dominated
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THE surprise decision by Australia’s central bank this month to slow the pace of rate increases was “finely balanced”, with domestic and global uncertainties dominating in the end.
Minutes of the Oct 4 policy meeting out on Tuesday showed the Reserve Bank of Australia’s (RBA) Board weighed a range of arguments for hiking by 50 basis points, as it had for four months straight, but decided to lift the cash rate by 25 basis points to 2.6 per cent.
The decision wrong footed many in the markets who had looked for an increase to 2.85 per cent, in part because the U.S. Federal Reserve was soon expected to hike by 75 basis points.
The RBA Board noted rates had already risen by 250 basis points since May and much of that had yet to feed through into mortgage payments. The tightening had also hit home prices and household wealth and could cool consumption over time.
While the labour market was very tight, wage growth had not spiked like in some developed nations and could still some more before threatening inflation expectations, the minutes showed.
Many central banks abroad had also been increasing rates which was likely to cause a period of “significantly lower output growth” and help lessen inflationary pressures.
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“Members noted that, in an uncertain environment, there was an argument to slow the adjustment of policy for a time to assess the effects of the significant increase in interest rates to date and the evolving economic outlook,” the minutes showed.
Still, the board emphasised that inflation in Australia was too high at 6.1 per cent and likely to rise toward 7.75 per cent by year end, with rents and utilities adding to cost pressures.
The board was resolute in returning inflation to its 2-3 per cent target band and recognised this required keeping inflation expectations well anchored.
“This was likely to require further increases in interest rates over the period ahead,” the minutes showed.
Markets are wagering on a further quarter-point hike at the next policy meeting on Nov 1 and see rates reaching as high as 4.0-4.25 per cent by May. REUTERS
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