Reserve Bank of Australia says rates still too low to contain inflation

AUSTRALIA’S central bank sees a need for more policy tightening as, even after recent hikes, interest rates are still too low to constrain inflation expectations amid a strong labour market.

Minutes of its July policy meeting out on Tuesday (Jul 19) showed the Reserve Bank of Australia (RBA) Board discussed the neutral rate - one that is neither expansionary nor contractionary – and decided the current rate of 1.35 per cent was “well below” that. 

“The level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation,” the minutes showed. “Members viewed it as important that inflation expectations remained well anchored and that the period of higher inflation be temporary.”

The central bank raised rates by 50 basis points at the meeting, the third hike in as many months. 

The neutral rate has been estimated to be in a range of 2 to 3 per cent, with RBA Governor Philip Lowe often nominating 2.5 per cent as around neutral.

However, the minutes showed the Board was concerned the neutral rate would rise if higher inflation became backed into household and business expectations.

Since the Board meeting on July 5, data has showed unemployment fell sharply in June to a 48-year low of 3.5 per cent as hiring outstripped all expectations.

With vacancies still at record highs and Australia essentially at full employment, markets wagered the RBA might chose to tighten even faster and raise rates by 75 basis points in August on the way to 3.25 per cent by year-end.

Consumer price figures due next week are expected to show annual inflation accelerated beyond 6 per cent in the June quarter, and the RBA itself expects it to reach at least 7 per cent by Christmas. 

SEE ALSO

Australia's biggest investors ramp up bonds in bet on RBA policy

Australia government to update on budget forecasts, RBA inquiry

Tuesday’s minutes showed the RBA expected inflation to decline back towards its 2 to 3 per cent target band in 2023, though that depended on expectations remaining anchored. 

The Board also discussed how Australia’s heavily indebted households would fare in the face of rising borrowing costs and inflation.

Spending data had so far held up well and many households had built up large excess savings following two years of pandemic lockdowns. 

“Members agreed it was important to continue to monitor these various influences on household spending when assessing the appropriate setting of monetary policy,” the minutes showed. REUTERS