Australia’s central bank considered two options for the size of its first interest-rate increase of 2023, minutes of its February meeting showed, eventually opting for a 25 basis-point adjustment while making a surprisingly hawkish policy shift.
(Bloomberg) — Australia’s central bank considered two options for the size of its first interest-rate increase of 2023, minutes of its February meeting showed, eventually opting for a 25 basis-point adjustment while making a surprisingly hawkish policy shift.
Board members deliberated over whether to resume hiking in half-percentage-point increments, minutes of the Feb.7 meeting showed Tuesday. Unlike in December, there was no consideration of pausing the tightening cycle.
The aggressive tone of the release sent three-year government bond yields up 6 basis points to a four-month high of 3.6% and boosted rate-hike bets. The RBA pointed to “more breadth and persistence” in inflation and a “very large” pool of household savings to underline the need for higher borrowing costs.
“Upcoming data will be important for the future path of interest rates,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia. “ Tomorrow’s Q4 Wage Price Index is the immediate focus.” The median estimate is for wages to rise 3.5% — a level not seen since September 2012.
A stronger wages number would vindicate the central bank’s hawkish turn. The minutes showed that among arguments for a half-point increase were a “pattern of incoming prices and wages data exceeding expectations, and a risk that high inflation would be persistent.”
Catherine Birch, a senior economist at Australia & New Zealand Banking Group Ltd., also said the RBA struck a hawkish note.
“Some of the concern around the upside risk to inflation really came through strongly,” she said. “From the RBA’s perspective, it would potentially be a harder situation to deal with if inflation was stickier and we don’t get the disinflation that we need to see.”
The RBA ultimately leaned in favor of a quarter-point move to 3.35% two weeks ago, citing uncertainty around the outlook, expectations that inflation had peaked, and the fact real incomes are falling. The rate-setting board also highlighted that its monthly gatherings provided frequent opportunities to assess the economy and adjust policy if needed.
Australia has lagged international counterparts in the scale of its rate increases, having hiked by 3.25 points since May, versus 4 in New Zealand and 4.5 in the US. The RBA’s slower pace reflects Governor Philip Lowe’s efforts to bring the economy in for a soft landing.
Money markets now imply a peak cash rate of 4.25% by August as core inflation remains well above the RBA’s 2-3% target and is expected to hit the top of that band only by end-2024. The central bank doesn’t provide its own forecast for the cash rate.
The RBA’s tightening has created a political problem for Prime Minister Anthony Albanese as he tries to persuade a heavily indebted electorate grappling with rising living costs that the pain of higher rates is necessary to avoid the worse outcome of entrenched inflation.
The government will release its budget in May, which is likely to have some targeted cost relief measures, although Treasurer Jim Chalmers has said it will keep a tight leash on fiscal spending.
(Adds comment from economist, updates markets.)
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