Reserve Bank nervous about rate hike lag

Fears of a delayed hit from rate hikes outweighed concerns about stubbornly high inflation when the Reserve Bank board made its surprising October cash rate decision.

The Reserve Bank of Australia decided to ease back to a 25 basis point interest rate lift despite markets broadly expecting another 50 basis point jump.

Minutes from the October board meeting reveal arguments for both 25 and 50 basis point lifts, with the smaller increment narrowly emerging as the better choice.

“A smaller increase than that agreed at preceding meetings was warranted given that the cash rate had been increased substantially in a short period of time and the full effect of that increase lay ahead,” the minutes said.

The board said the cash rate was getting close to the interest rate buffers applied when many borrowers took out their home loans.

They also flagged the risk of households restricting spending more than anticipated.

Spending has remained resilient despite consumers expressing their concerns about the state of the economy in surveys designed to measure confidence.

The fact that most people have jobs is thought to be playing into elevated spending results.

On the other hand, the central bank considered a larger rate hike, based on fears about persistently high inflation and the possibility of wage growth surging as it has in other economies. This would make it harder to rein in inflation.

Flooding in southeast Australia has emerged as another likely driver of inflation, the treasurer has warned.

While Jim Chalmers said it was too early to tell how much damage the floods would do to the federal budget and the economy more broadly, he said the disaster would be factored into the budget’s inflation projections.

Royal Bank of Canada economists said the minutes showed the RBA would start paying more attention to consumer spending, housing and labour market data.

“It is no longer almost solely focused on inflation,” economists Su-Lin Ong and Robert Thompson said.

Ms Ong and Mr Thompson stuck with their forecast for 25 basis point lifts in October and November, although have not ruled out another hike early next year.

“The risk remains for another hike in February and we are mindful of the ongoing shifting into firmly restrictive territory and outsized rate hikes by much of the global central banking community,” they said.

Rising interest rates have added 35 per cent to the average monthly mortgage repayment, with Canstar’s Steve Mickenbecker urging mortgage holders to stress-test their own budgets and consider refinancing before the financial stresses get worse.

“It’s important that borrowers do something now rather than wait until they are desperate, as the options they have now may dry up if they delay action until their situation is dire,” Mr Mickenbecker said.

“When you’re struggling to pay the loan and the bills, you’ll struggle to get a loan approved.”


Poppy Johnston
(Australian Associated Press)


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Categories: RBA