RBA: 25bps Hike Argument Rested On Growth Risks, Potential For Inflation To Subside Quickly
- Published on
- 18 Oct 2022, 11:50 AM
--Arguments for 25bps and 50bps hike were finely balanced
--Reason for 25bps rested on growth risks and potential for inflation to “subside quickly”
--Argument for 50bps stemmed from inflation environment and risks to inflation expectations
--Hikes by 25bps because cash rate increased substantially in short period of time
--Saw benefit of smaller increase while assessing incoming data on global, domestic economy
--In uncertain environment, there was an argument to slow policy adjustment “for a time”
--Cash Rate not at an especially high level
--Limited spare capacity in labor market
--TWI has greater bearing on imported inflation than bilateral exchange rates
--Monthly CPI shows inflation remained high, in line with RBA expectations
--Timely data showed household spending held up well in Sep quarter
By Sophia Rodrigues
(Sydney, October 18, 2022)—The Reserve Bank of Australia saw arguments for either a 25bps or a 50bps hike as “finely balanced” but one reason for opting for a smaller increase was to assess incoming data on both the global and domestic economy.
“In an uncertain environment, there was an argument to slow the adjustment of policy for a time to assess the effects of the significant increases in interest rates to date and the evolving economic outlook,” the RBA said.
The arguments for a smaller 25bps hike at the October meeting rested on the risks to global and domestic growth and the potential for inflation to subside quickly, while arguments for 50bps hike stemmed from the inflationary environment and risks to inflation expectations.
The nature of the key arguments in favor of either 25bps or 50bps suggest the RBA will revert to 50bps hike if risks at the next meeting in November moved in that direction.
In other words, if inflation risks moved to the upside, the RBA is more likely to opt for 50bps hike in November.
The main reason to hike by 25bps was that the cash rate had been increased substantially in a short period of time and the full effect of that increase lay ahead, the RBA said in the minutes of the October board meeting, published Tuesday.
While arguing for 50bps hike, the RBA noted that the cash rate was not at an especially high level. The RBA also considered that it would be the first advanced economy central bank to reduce the size of rate increase, and it might prompt an unhelpful reaction in inflation expectations and financial markets if its resolve to reduce inflation was questions.
“Ultimately, if upside risks to inflation were to materialise, or the credibility of the path to reduce inflation came into question, it would be costly to re-establish low inflation,” the RBA said.
Among reasons for 25bps hike was the fact that the tightening of monetary policy was having a clear effect in the housing market, and previous episodes of lower housing prices and turnover had seen a large effect on consumer spending via the wealth channel.
The RBA also argued that wages growth had not reached levels that would be inconsistent with the inflation target, and that external inflationary pressures might ease quickly given that the global outlook had deteriorated.