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The Reserve Bank of Australia (RBA) released its September monetary policy meeting minutes (20 September), which revealed the board discussed the option of a 25 or 50-bp hike, before deciding on a 50-bp bump.
This marked the fourth 50-bp cash rate hike, followed by a 25-bp bump in May, which took the cash rate to 2.35 per cent.
In justifying another 50-bp hike the RBA noted that “members observed that timely indicators pointed to inflation remaining high and broadly based in the September quarter”.
“High inflation was impinging on households’ real incomes and sentiment, and the rapid increase in interest rates would further weigh on aggregate household disposable income,” the RBA said.
However, the board noted that “household spending appeared to have held up in the September quarter to date”, and seemed resolute in the need to ensure inflation returned to target between 2–3 per cent while keeping the economy on an “even keel”.
The RBA’s September minutes also noted that “the full effects of higher interest rates were yet to be felt in mortgage payments, and the broader effects on activity and inflation would take some time to be apparent”.
These concerns have been shared by NAB economist Alan Oster who has said the central bank’s aggressive hikes were “flying blind”, with impact not likely to hit the economy for around 12 months.
In addition the statement that the board needs “to account for the risks to growth and employment” is new, which comes off the back of a review in the central bank communication launched by the Treasury.
Economists debate rate hikes
While it is widely accepted that the central bank will lift the cash rate once again next month, the debate remains on how much, with a number of forecasters changing their predictions following governor Philip Lowe’s meeting with the Anika Foundation event on Thursday (8 September).
However, the central bank weighed up the option for a 25-bp hike in September and has reiterated the support for an October “business as usual” 25-bp cash-rate hike, given the option was not on the table in August or July.
Westpac economists, alongside NAB’s, expect the RBA to lift the cash rate by a further 50 bps, while CBA is holding on to its 25-bp October prediction.
In fact, CBA has said the minutes “lend weight” to the idea that the pace of tightening will slow from here.
Westpac’s economists have indicated that the RBA will “dial down” its aggressive hikes from November, who share NAB’s predictions.
But unlike most analysts, Westpac’s Bill Evans said “we continue to expect that the tightening cycle will continue for November, December and February.”
“Clear evidence of a slowdown in inflation is unlikely to emerge until February 2023, paving the way for the RBA to halt the rate hikes in March,” he said.
Westpac has already marked down its growth forecast for the economy to 1 per cent in 2022 and 2023, and is sticking with that call for now, while noting downside risks.
[Related: CBA calls October 25-bps cash rate hike]
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