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As the final piece of communication for the Reserve Bank of Australia (RBA), released on Tuesday (20 December), the monetary minutes revealed that the board considered the case to leave the policy unchanged in December before deciding on a 25-basis point (bp) hike.
“The Board considered several options for the cash rate decision at the December meeting: a 50-basis point increase; a 25-basis point increase; or no change in the cash rate,” the December minutes revealed.
This was a new development, with the RBA having tossed up the options for at least 25 bps, 40 bps or 50 bps in previous months.
The board noted the argument for no change given the “lagged effects of the large policy adjustment to date”, however, the central bank’s most recent forecasts had indicated that “inflation was expected to take several years to return to the target range”.
This came despite a fall in monthly inflation figures released by the Australian Bureau of Statistics (ABS) to 6.9 per cent in September.
“While the easing in the monthly pace of inflation had been welcome, the monthly indicator was still new and needed to be interpreted with caution, and some further strengthening in inflation was expected in coming months.”
Thus, the December 25-bp increase marked the eighth consecutive cash rate hike for the year, taking the cash rate to 3.1 per cent.
While it came as bad news to borrowers ahead of the holiday season, the decision not to lift the cash rate by 50 bps may have provided some reprieve, for now.
As the RBA is firm on bringing inflation back to its target range of 2 to 3 per cent, it said this was likely to involve a period of very weak demand and “possibly a recession”.
However, it noted that it would take “some time” for the cash rate to begin to dampen demand, as “the cash rate was not yet at a high level historically”.
The central bank reiterated that it was not a “pre-set path”, but more hikes were anticipated.
Tightening cycle ‘nearly done’
The Commonwealth Bank’s (CBA) economist, Gareth Aird, said the consideration to leave the policy unchanged “means the RBA is close to pausing”.
“It is unusual that the Board considered both increasing the cash rate by a bigger‑than‑usual 50 bps and leaving policy on hold.
“It appears that the RBA is going out of their way to show us that all options were on the table in December.”
The minutes also stated that members noted 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”.
Mr Aird said the case to keep the cash rate unchanged for a period of time to assess the state of the economy and the inflation outlook is strong.
“But we don’t know what they are willing to hang a pause on”.
“The RBA’s forward guidance is sufficiently vague that all options will be on the table at the February 2023 board meeting.”
Nonetheless, CBA’s cash rate predictions remain unchanged, with one further 25-bp hike expected in early 2023, taking the cash rate to 3.35 per cent.
“We continue to expect rate cuts in late 2023 and have pencilled in 50 bps of easing in Q4 23.”
[Related: Inflation tipped to weigh on December’s rate hike]
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