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The federal government has warned the recent floods will drive food prices high as farms go underwater, which will be factored into the Reserve Bank of Australia's (RBA) next monetary policy meeting decision as the increased costs fuel inflation.
In releasing the October monetary policy meeting minutes (18 October), the board noted that 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 October minutes revealed the board discussed the option of a 25 or 50-bp hike, with no other option considered, before deciding on a 25-bp bump, which marked the sixth consecutive cash rate hike since the central bank started lifting the cash rate away from its historic low levels in May.
October’s 25-bp lifted the official cash rate to 2.6 per cent and also saw the central bank move away from its aggressive 50-bp hikes that preceded it for four consecutive months.
The minutes noted the arguments for a 25 or 50-bp were “finely balanced”, but the case for a 25-bp bump was “stronger” 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 Commonwealth Bank’s (CBA) economist Belinda Allen noted that the transmission delays between interest rate rises and higher mortgage repayments at CBA had a three-month lag time.
It means that only 125 bps of tightening would have hit “mortgage holder’s cash flow”, with the July 50-bp hike now just flowing through to higher mortgage repayments, Ms Allen said.
Given this and other economic factors, CBA expects one more 25-bp lift in November, with the potential of another in December.
The RBA’s board members also recognised the benefits of a smaller increase for October while the incoming data on both the global and domestic economy was being assessed.
“The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” the board noted.
The board remains resolute in its determination to return inflation to target of 2–3 per cent and has consistently said it will do “what is necessary to achieve that outcome.”
However, in reducing the size of rate hikes, it feared it could prompt an “unhelpful reaction in inflation expectations and financial markets”, if the community came to “question” the board’s resolve to reduce inflation.
The board also warned that the cash rate was “close to the interest rate buffer” applied when many current borrowers took out their loans, which was increased to 3 per cent by the Australian Prudential Regulation Authority (APRA) in late 2021.
Given the RBA has increased the cash rate by 2.5 per cent since May 2022, further rate hikes will breach the serviceability buffer applied for many recent borrowers.
Despite this, as the RBA prepares for its next monetary policy meeting on 1 November, the minutes said it would “likely require further increases in interest rates over the period ahead”.
Floods push prices up
As the central bank remains on course to bring inflation down, the flood disaster across NSW, Victoria and Tasmania will contribute to inflationary pressures.
The local disaster comes as Treasurer Jim Chalmers returns from the US following talks with G20 counterparts, which surrounded the International Monetary Funds (IMF) warnings of a global recession and increasing inflation.
Mr Chalmers said central banks have got a “difficult job to do, here and around the world”, as inflation is increasing in many parts of the world.
“There is a real concern around the world, that with inflation as high as it is and has been, and the blunt and brutal application of monetary policy to that situation does risk a hard landing,” he said.
He added that the recent pressure from natural disasters will add further cost-of-living pressures.
“When you’re talking about absolutely prime agricultural land, making some of the biggest contributions to our grocery aisles, there will be an impact, and it will be a substantial impact I fear.”
Indeed as the central bank usually weighs up cost-of-living pressures, they will take these current “temporary pressures on inflation” into account, Mr Chalmers said.
“No doubt they are as attentive to what’s going on in the food bowls of Australia as we are, and they’ll take it into consideration.”
[Related: How the RBA's rate move will impact mortgagors]
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