Melbourne Cup Day rate hike needed to avoid risk of future interest rate increases: RBA

The risk of more rate hikes in the months ahead would have increased had the RBA opted against increasing rates on November 7, fresh meeting minutes have revealed.

Delaying the Melbourne Cup Day rate hike would have risked a more aggressive increase to interest rates in the months ahead, fresh meeting minutes released by the Reserve Bank have revealed.

The RBA, in its November 7 board minutes released on Tuesday, also noted its updated economic forecasts, which show inflation returning to the central bank’s 2 to 3 per cent target band by the end of 2025, were based on “one or two” further rate rises.

Despite recognising that some households were suffering a “painful squeeze on their finances”, the RBA opted to hike interest rates for a 13th time to 4.35 per cent, the highest level since 2011.

Considering the case to leave the cash rate unchanged at 4.1 per cent, the board said inflation was easing and the geopolitical outlook remained uncertain, noting the escalation of conflict in the Middle East was likely to “dampen consumer confidence and global demand.”

Opting to a delay an increase to the cash rate would increase the risk of further hikes, the statement warned. Picture: NCA NewsWire / Martin Ollman

However, the central bank said the case to hike again was the stronger one granted the RBA had itself said in previous statements and speeches that it did not want inflation to remain higher for longer.

“Delaying such an adjustment would create a risk that a larger monetary policy response might be required in coming months, especially if inflation pressures turned out to be stronger than expected,” the meeting minutes read.

“[The board] agreed there was a risk of inflation expectations increasing if the Board left the cash rate target unchanged at this meeting, particularly given the Board’s repeated statements that it has a low tolerance for inflation returning to target after 2025.”

Adding to the case for a rate hike was signs that domestically generated demand was adding to inflationary pressures across the economy.

“This strength in demand was allowing firms to pass on higher costs for labour and non-labour inputs,” thus further fuelling inflation.

Despite households experiencing a “painful squeeze on their finances” the RBA opted to hike the cash rate a 13th time. Picture: NCA NewsWire /Brenton Edwards

While noting pressure on borrowers, the minutes noted that the banks “had not seen a significant rise in the incidence of households experiencing difficulties making their mortgage payments.”

“More generally, members noted that fixed-rate borrowers were tending to roll onto variable-rate loans without a noticeable adverse effect on their ability to service their loans,” the minutes read.

RBA prepared to hike again

The board remained “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”, but another rate hike was not guaranteed, the minutes said.

“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame would depend on how the incoming data alter the economic outlook and the evolving assessment of risks”.

Appearing at a panel discussion on Tuesday morning, the RBA governor noted that Australia’s “crucial challenge” for inflation had not purely been driven by supply side shocks.

RBA governor Michele Bullock and Treasurer Jim Chalmers appeared at the ASIC Annual Forum in Melbourne on Tuesday. Aaron Francis / The Australian

“There is a bit of a perception around that the inflation at the moment really is all a supply driven thing – petrol prices, rents, these sorts of things, energy – but actually there’s an underlying demand component to it as well,” Ms Bullock told the ASIC annual forum.

“But there’s actually an underlying demand component to it and that’s what the central banks are trying to get on top of.”

The RBA will receive fresh monthly inflation data next week before its eight-member board meets for the final time this year on December 5. However, money markets are pricing a less than one in 10 chance of a hike next month.

Nevertheless, economists and investors expect a February rate hike remains a live option for the central bank.