RBA minutes reveal further hikes not off the table

The Reserve Bank of Australia's (RBA) call to pause rate hikes rested on a decision to gather more information, it said.

The minutes from its April 4 board meeting, where it decided to keep the cash rate at 3.60%, reveal the board extensively weighed economic impacts of both options.

It said board members discussed the uncertainties surrounding the impact that historically rapid increase in interest rates would have on the economy.

"Members first discussed the case for a further 25 basis point increase in the cash rate target at this meeting. This case was again founded on the observation that inflation remained too high, and the labour market was very tight," it said.

The minutes explained the board considered the argument that, in these circumstances, it was better to continue to raise interest rates to ensure inflation is brought back to target faster, noting that monetary policy could be eased quickly if an adverse shock caused inflation and economic activity to slow by more, or more rapidly, than forecast.

"Members also noted that most households were in a strong financial position and would be able to absorb higher prices and interest rates without needing to materially draw down on their savings," it said.

However, the RBA noted some households were already having to do so and only "a few" households with mortgages were at risk of having negative equity in their homes.

Two other pieces of information accumulated since the previous meeting were relevant to the case for tightening monetary policy further, it explained.

One was the upgrade to near-term projections for population growth which it found could put significant pressure on Australia's existing capital stock.

The other was the increased risk of larger wage increases in parts of the economy, including in the public sector, later in the year which it judged would have some impact.

The members then discussed the case for not changing monetary policy at the meeting and said it found monetary policy had already been tightened significantly in a short period.

The board weighed up the value of pausing at the meeting to gather more information on the economic outlook.

"Over the coming month, members observed that they would receive another quarterly reading on inflation, additional monthly readings on the labour market, household spending and business conditions, and further information on developments in the global economy and financial markets," the minutes said.

The RBA board recognised the strength of both sets of arguments, but on balance agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings.

"In considering communication of the board's decision, 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," it explained.

This article first appeared on Financial Standard

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