April decision to “pause” rate hiking strategy a close call, Reserve Bank minutes reveal

Senior Business Correspondent Peter Ryan

The Reserve Bank has revealed its decision to pause its aggressive interest rate hiking strategy was a close call while warning that more hikes might be needed to tame inflation.

In the minutes from its April 4 meeting where the cash rate was frozen at 3.6 percent, board members debated the case to impose another 0.25 percentage point increase noting that inflation “remained too high” with the labour market “very tight”.

It was argued that forecasts for inflation not to return to the 2 to 3 percent target band until mid-2025 were inconsistent with the Board’s mandate to tolerate a slower return to the zone.

“Members considered the argument that .. it was better to continue to raise interest rates to ensure inflation is brought back to target faster,” the minutes say.

“Monetary policy could be eased quickly if an adverse shock caused inflation and economic activity to slow more rapidly than forecast.”

In addition, an upgrade in projections to population growth raised concerns about “significant pressure” in capital stocks especially housing “which in turn could manifest in higher consumer prices.”

“Although higher immigration might reduce wage pressures .. members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period”.

The minutes also show jitters about an increased risk of larger wage increases in parts of the economy, including the public sector.

However, the Board ultimately decided to “pause” after ten consecutive increases since May 2022 because policy had been “tightened significantly in a short period”.

The Board agreed on a wait and see approached given that the “full effects .. on the economy are yet to be observed given the lags in the transmission of monetary policy”.

Members noted that the rate rises had contributed to a slowdown in the housing market, a material slowing in consumption and “financial pressure for a segment of households with housing loans”.

However, the minutes show a commitment from the RBA board to do whatever it takes to tame inflation warning that more rate hikes were possible.

“Members observed it was important to be clear that monetary policy might need to be tightened at subsequent meetings and that the purpose of pausing at this meeting was to allow time to gather more information.”

A potential trigger for a review of the pause is next week’s quarterly inflation reading (CPI) which will be “valuable in reassessing the economic outlook and the extent to which monetary policy would need to be tightened further.”

While global developments weigh on future cash rate decisions, the Board said that concerns about the stability of banks in the US and Europe were not a factor in the decision to freeze rates.

“The strength of the Australian banking sector meant that financial system resilience was not a consideration in the decision to pause.”

The Reserve Bank board’s next meeting on May 2 will be closely watched with money markets tipping another pause in rate rises.