The resilience of Australian households, higher-than-expected population growth and wage boosts for parts of the public sector fed into the case for another interest rate hike in April.
While the Reserve Bank of Australia board ultimately landed on a pause after 10 consecutive hikes when it met a fortnight ago, it appears to have been a close call, with members agreeing “strength” underpinned both options.
Central to the case for another 25 basis point hike was inflation that was “still too high”, and a labour market that was “very tight”, according to the board minutes, released on Tuesday.
Modelling by RBA staff in March found that with a bit more tightening, inflation is expected to return to the 2-3 per cent target by mid-2025.
“Members observed that it was important to be clear that monetary policy may need to be tightened at subsequent meetings and that the purpose of pausing at this meeting was to allow time to gather more information,” the minutes said.
Board members said it would be inconsistent with the RBA’s mandate to allow inflation to remain above target for any longer than that.
They also pointed to stickier-than-expected inflation in other countries, and that the demand for housing and energy was outpacing supply, which could keep upwards pressure on inflation.
The minutes noted that under these conditions, it was better to raise rates high enough to bring inflation down rapidly, knowing there was the option of cutting rates “quickly” if the slowdown started happening faster than expected.
The rebound in population growth after migration ground to a halt during COVID could also be inflationary, they said, including by putting pressure on the housing stock.
“Although higher immigration might reduce wage pressures in industries that had been experiencing significant labour shortages, members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period,” they said.
While board members said wages growth was still consistent with returning inflation to target, wages growth in the public sector was likely to increase in coming quarters as new state government wages policies kicked in.
In the private sector, the bank’s business liaison program suggested annual wages growth would level out at a little below 4 per cent.
And also in support of a hike in April, high levels of savings and the fact that most people have jobs means many households are well placed to absorb higher interest rates.
But the case for holding the cash rate steady won out, with the board confident monetary tightening was starting to take effect and now was the time to wait for the full impact to wash through.
The board also decided it was worth waiting for key data sources that would paint a clearer picture of the health of the economy, including the quarterly inflation and employment data, which has since come in hotter than expected.
A full set of updated forecasts from the RBA staff is also expected at the May meeting.
“Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable time frame,” the minutes concluded.
So far, the RBA’s decision to keep interest rates on hold has done little to soothe the nerves of Australian consumers.
The weekly measure of consumer confidence from ANZ and Roy Morgan reported a 2.1-point decline last week to 77.2, its seventh weakest result since the COVID outbreak in March 2020.
The Reserve Bank board next meets on May 2, with markets so far leaning towards a continued pause in rate rises.
– with AAP
