The Reserve Bank’s decision to reduce the size of the interest rate rises this month had been “finely balanced” with the risk of a global and domestic economic slowdown, but further interest rate rises are likely to be required, minutes from the central bank’s October board meeting show.
Earlier this month, the RBA surprised many economists and the markets by hiking its cash rate by 25 basis points – half the expected amount – to 2.6%.
This snapped a record run of four consecutive increases of half a percentage point, and made Australia the first among advanced economies to make such a move, the RBA noted.
“The arguments for a 25 basis point increase rested on the risks to global and domestic growth, and the potential for inflation to subside quickly,” the RBA said, adding that other nations’ rate rises were likely to result in “a period of significantly lower output growth”, which would ease external inflationary pressures on Australia.
The bank said the “full effect” lays ahead after Australia’s rapid interest rate rises, which are at the fastest pace since 1994. Still, establishing “a more sustainable balance of demand and supply” in the local economy was “likely to require further increases in interest rates in the period ahead”.
Prior to Tuesday’s release of the October meeting minutes, investors were predicting another 25 basis point increase by the RBA at the 1 November meeting, giving this a four-in-five chance. Markets were also expecting the cash rate to approach 4% by the second half of next year.
The RBA said wages growth had accelerated in Australia as it had in some other nations. Some further increases in wages “would not necessarily be cause for concern” provided “inflation expectations remained well-anchored”, it said.
One reason the board gave for slowing rate rises was that this allowed the RBA time to assess the effects of the hikes so far.
“Drawing out policy adjustments would also help to keep public attention focussed for a longer period on the board’s resolve to return inflation to target.”
This view dovetails with those of some banks, such as Westpac and ANZ, which predict the cash rate to peak later and higher, compared with some other banks. The Commonwealth Bank, which accurately tipped the October rise, has been forecasting just one more 25 point rise to 2.85% before the RBA begins cutting next year.
Ahead of the RBA's release of the minutes of its October board meeting, investors were betting another 25bp rate increase in November as an 80% chance. Looking ahead, they were also back to predicting a cash rate peak of about 4% in the second half of 2023. pic.twitter.com/qliiC9GT4Z
— Peter Hannam (@p_hannam) October 18, 2022
Other cases for the moderation of rate rises include signs that rising mortgage costs and inflation were already putting pressure on household budgets, and consumer confidence had fallen.
Similarly, the drop in property prices across most markets “after earlier large increases” would likely have a large effect on consumer spending if previous declines were any guide, the RBA said.
But the central bank identified “upside risks to inflation” remain, given the tight labour market, with the jobless rate near a 50-year low as as firms struggle to find employees. Rents and energy costs were also potential propellents for higher prices.
For now, though, the RBA’s “central forecast” is for the consumer prices index to reach 7.75% by the end of the year before falling to “a little over 4% over 2023 and around 3% over 2024”.
The September quarter CPI numbers are due for release on 26 October, a day after the Albanese government presents its first budget.
Echoing concerns made this week by the treasurer Jim Chalmers about slowing global growtht, the RBA noted “core inflation was yet to show any signs of easing in most advanced economies”.
The board members also noted the “significant headwinds” that continue for the Chinese economy – Australia’s biggest trading partner – particularly in relation to construction.
“In response to mounting concerns about developers pausing or abandoning development projects, the Chinese authorities had put in place a number of measures to support the completion of projects,” the RBA said. “However, given the sharp decline in starts, housing construction was expected to fall further for some time.”
The RBA also noted the Australian dollar had weakened further against the US dollar, but had “appreciated slightly over 2022 on a trade-weighted basis”. That’s another way of saying the Australian dollar hadn’t fallen as much against the greenback as the currencies of nations with whom Australia does most of its.
