RBA says to expect more rate rises, but no ‘preset path’

RBA flags more rate rises but says it is also preparing to slow the pace of policy tightening.

The RBA board ‘expects’ to keep hiking rates to tame the highest rate of inflation since the 1990s. Picture: AFP

The Reserve Bank board says it “expects” rather than “needs” to keep hiking rates to tame the highest rate of inflation since the 1990s, according to newly released minutes that reveal a ­central bank preparing to slow its breakneck pace of policy tightening.

The RBA on August 2 delivered a third straight increase of half a percentage point to its cash rate, lifting it to 1.85 per cent, up from just 0.1 per cent as recently as April.

“Given high inflation, the resilient economy and the tight ­labour market, and taking into account the risks, members agreed it was appropriate to continue the process of normalising monetary conditions,” said the minutes from the August board meeting.

Whereas in previous meetings board members had weighed up whether to move by 0.25 or 0.5 percentage points, at the ­August meeting there was no prevarication at all: simply a statement that the board “decided to increase the cash rate by a ­further 50 basis points”.

The RBA board noted that international developments – including Covid-19 disruptions and the Ukraine war – “explained much” of the highest inflation rate since the 1990s, but “domestic factors were increasingly playing a role”.

“There were widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy,” the minutes said.

“The increase in interest rates over recent months has been required to bring inflation back to target by ensuring that inflation expectations remain anchored and establishing a more sustainable balance of demand and supply in the Australian economy.”

Commonwealth Bank head of Australian economics Gareth Aird said it was important that the latest minutes removed a previous reference that interest rates were “very low for an economy with a tight labour market and facing a period of higher ­inflation”.

“It does not preclude further tightening. But it implies the board is open to slowing down the pace of tightening and indeed pausing in their cycle in the not-too-distant future,” Mr Aird said.

He said he expects rates to peak at 2.6 per cent later this year.

As in RBA governor Philip Lowe’s statement accompanying the August rates decision, the minutes also noted that the board was “not on a preset path”.

“It is seeking to do this (tighten policy) in a way that keeps the economy on an even keel,” the minutes read.

“The path to achieve this balance is a narrow one and subject to considerable uncertainty.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market, including the risks to the outlook.”

Despite the subtle shifts in language, Mr Aird said he still predicted a further half a percentage point rate hike on September 6 “but this is certainly not a done deal”.

Westpac chief economist Bill Evans said the central bank would slow the pace of rate hikes to 0.25 percentage points by the October meeting, but there would be no relief from monthly rate hikes (excluding the January break) until February, at which point the cash rate would be 3.35 per cent.

Mr Evans said the minutes showed the RBA believed households would prove resilient to rate hikes in 2022.

“Growth in consumption was expected to remain strong over the second half of the year reflecting strong labour income, still high savings rates and strengthened household balance sheets,” the minutes said.

Reserve Bank of Australia governor Philip Lowe has said monetary policy is not on a ‘preset path’. Picture: Arsineh Houspian

The Australian Bureau of Statistics will release its wage price index for the June quarter on Wednesday, which economists anticipate will show wages growth accelerating from 2.4 per cent over the year to March, to 2.7-2.8 per cent – still well shy of the 6.1 per cent rate of inflation.

On Thursday, economists are also expecting labour force figures to show unemployment for July holding steady at a near 50-year low of 3.5 per cent.

The RBA minutes revealed the board’s view that firms were expecting wages growth to reach 3.75 per cent by the end of 2024.

“In liaison, over 60 per cent of private sector firms indicated that they expected to raise wages by more than 3 per cent over the year ahead,” the minutes read.

“Recent high inflation outcomes were a factor in current wage negotiations, but to date most firms expected to raise wages by less than inflation.”

The RBA expects inflation to peak at 7.75 per cent by the end of 2022, before trending down to about 3 per cent over the next two years.

A new monthly consumer price index from the ABS, released on Tuesday, which does not include the entire basket of goods and services included in the quarterly measure, showed annual inflation running at 6.8 per cent.