RBA contemplated larger cash rate hike

The minutes of the Reserve Bank of Australia’s May board meeting have indicated it is prepared to raise the cash rate by larger increments to tame inflation if needed.

Such a warning will do little to soothe already crumbling consumer confidence, which has sunk to its lowest level since mid-August 2020.

The May RBA meeting endorsed an increase in the cash rate to 0.35 per cent from a record low 0.1 per cent following a spike in annual inflation to 5.1 per cent, the fastest pace since GST was introduced in 2000/01.

The minutes show that three options were discussed at the meeting as to the size of the first hike in more than a decade – 15, 25 and 40 basis points.

In the end, members agreed that 25 basis points would help signal that the board was now returning to normal operating procedures after the extraordinary period of the pandemic.

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates,” the minutes said.

Economists expect the RBA will raise the cash rate by 25 basis points at its June meeting, assuming Wednesday’s wage growth figures fall in line with expectations – a 0.8 per cent increase for the March quarter for an annual rise of 2.5 per cent.

“A sharp upward surprise could see the RBA contemplate a larger hike,” National Australia Bank economist Tapas Strickland said.

But he thought that was more likely at the August board meeting following an expected large inflation result for the June quarter due on July 27.

The minutes released on Tuesday show the RBA board believed there was a risk of inflation pressures building even further if it had waited any longer to raise the cash rate.

“Members observed that it would be more difficult to return inflation to the target if the inflation psychology in Australia were to shift in an enduring way,” the minutes say.

The minutes say the significant rise in inflation had been largely the result of global factors, which were likely to have a more temporary effect.

“(But) the flow of information on inflation and wages over the preceding month had been consistent with more persistent inflationary pressures arising from limited spare capacity in the domestic economy,” the minutes say.

As such, board members agreed the conditions the board had set to increase the cash rate had been met.

“They also agreed that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time,” the minutes say.

“In making its decisions, the board agreed that it will continue to be guided by the evidence on both inflation and the labour market, while noting that significant uncertainties remain.”

Meanwhile, consumer confidence took a further tumble in the past week as cost of living pressures continue to mount, not helped by a renewed rise in petrol prices.

The ANZ-Roy Morgan consumer confidence – a guide to future household spending – shed another 1.3 per cent to 89.3, its fourth consecutive weekly decline.

“Cost of living concerns are front and centre for consumers,” ANZ head of Australian economics David Plank said.

Concern about the outlook for interest rates is particularly weighing on respondents who are paying off a home loan, among whom confidence fell by a further 0.6 per cent for a cumulative 14.7 per cent decline in the past three weeks.

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

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