RBA Considered 50bps Hike At Dec Meeting; Noted No Central Bank Has Paused

By Sophia Rodrigues

(Sydney, December 20, 2022)—The Reserve Bank of Australia was the first major central bank to slow the pace of policy rate hikes in the current global tightening cycle, but when it comes to pause, it might not want to be the first one.

The minutes of the December board meeting, published Tuesday, revealed the RBA considered three options for the cash rate – 50bps hike, 25bps and no change.

Of the three, the argument for a pause was the weakest because the inflation outlook had not changed since the November policy statement. That forecasts in that statement showed that even with further increases in the cash rate, inflation was expected to take several years to return to the target range.

“Moreover, members noted that no other central bank had yet paused,” the RBA said.

The fact that the RBA even considered a 50bps hike is a surprise, given market was pricing around 25% probability it would leave the rate unchanged.

Not only was 50bps was on the table, but the arguments in favour of such a move and thus “more pre-emptive action” were also well supported.

For the first time, the RBA used the term “recession” in the Australian context. It noted that Australia may be lagging other countries which operated with excess demand and subsequently saw wages growth pick up strongly which required a period of weak demand to allow inflation to return to target, and “possibly a recession.”

“Australia was not yet in such a situation, but the inflation mindset was shifting, with firms more willing to put up prices than a year earlier and upside risks to wages growth potentially building,” the minutes said.

Another argument for 50bps was that the cash rate was not yet at a historically high level and if policy needed to move to a more restrictive stance, it would take some time for this to dampen demand.

The reasons do hike by 25bps were largely the same as the previous two meetings, with the main reason being the “material increase” in the cash rate effected in a short period of time and the lags in the operation of policy.

The RBA also reiterated “the importance of acting consistently, and that shifting to either larger increases or pausing at this point with no clear impetus from the incoming data would create uncertainty about the Board’s reaction function.”

Overall, the minutes showed that the risk of 25bps cash rate hike at the next board meeting in February is higher than for a pause.

The RBA emphasised that a range of actions could be considered again at upcoming meetings in 2023. It did not rule out returning to larger increases if the situation warranted or the preparedness to keep the rate unchanged while assessing the state of the economy and the inflation outlook.

--Contact: Sophia@centralbankintel.com