Australia’s central bank considered raising interest rates this month before deciding the case to stand pat was “stronger,” while signaling it’s prepared to tighten further should inflation take too long to return to target.
(Bloomberg) — Australia’s central bank considered raising interest rates this month before deciding the case to stand pat was “stronger,” while signaling it’s prepared to tighten further should inflation take too long to return to target.
At Michele Bullock’s first policy meeting as governor, the Reserve Bank kept rates unchanged amid concerns its 4 percentage points of hikes since May 2022 could slow the economy more sharply than forecast, minutes of the Oct. 3 meeting showed Tuesday. Members pointed to lags in policy transmission while noting the 4.1% cash rate are already having an impact.
Economists and traders latched on to a new sentence in the minutes that said “the board has a low tolerance for a slower return of inflation to target than currently expected.” In response, the currency rose as much as 0.3% against the dollar and yields on the policy-sensitive three-year government bonds jumped 10 basis points to 4.05%.
The minutes “read more hawkishly than the September set,” said Adam Boyton, head of Australian economics at ANZ Banking Group Ltd. “Our view is that a rate rise in November would require an uncomfortably high CPI print, possibly combined with some sign of strength in the labor market.”
Monthly employment data will come out Thursday and the third-quarter inflation report will be released next week. The central bank will also receive its staff’s quarterly update of economic forecasts at the Nov. 7 meeting.
The RBA said in the minutes that the case to raise rates centered on the risk that inflation might prove stickier than anticipated and may not meet the forecast for it to fall back within the 2-3% target by late 2025.
Several eye-catching lines, including “low tolerance” for persistent inflation “sparked the Aussie bounce, especially given that these were the first minutes under a new governor,” said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney. “Markets have become accustomed to very familiar phrases in the minutes that didn’t indicate a serious threat to hike again.”
Australia’s job market remains tight with unemployment hovering in a 3.4-3.7% range over the past year. Other readings on the economy point to a reasonable impulse with business conditions showing ongoing resilience and job vacancies remaining high. The residential property market has also unexpectedly rebounded strongly this year.
Members “noted that while rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected,” the RBA said.
“The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed.”
Policymakers, however, concluded that the case to hold was the “stronger one” as they assess the impact of their tightening campaign so far. The board also highlighted that “the labor market had reached a turning point and the challenges in the Chinese economy could lead to slower growth in Australia if not contained.”
–With assistance from Matthew Burgess and Masaki Kondo.
(Adds market reaction, comment from economist, FX strategist.)
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