Reserve Bank weighed slower rate hike at September policy meeting

The central bank has highlighted a deteriorating global outlook as a ‘key uncertainty’ as it debated whether to slow the pace of rate hikes.

RBA governor Philip Lowe has said the board at the next board meeting will discuss wether to extend the run of double-rate hikes to five. Picture: NewsWire / Monique Harmer

The Reserve Bank board at its last meeting discussed the case for slowing the pace of rate rises, and highlighted a deteriorating global economic outlook as a “key uncertainty” for its efforts to contain inflation without triggering a jump in unemployment.

With the US Federal Reserve poised to hike by as much as 1 percentage point on Thursday morning, Australian time, minutes from the RBA’s September 6 board meeting showed the central bank was increasingly concerned that its counterparts in Europe, the UK and America would trigger recessions in their fight to contain inflation.

The RBA delivered the fourth consecutive half a percentage point rate rise earlier this month – the fourth consecutive double rate rise, which, along with a 0.25 percentage point move in May, has taken the key cash rate from 0.1 per cent to 2.35 per cent.

“Given the importance of returning inflation to target, the potential damage to the economy from persistent high inflation and the still relatively low level of the cash rate, the board decided to increase the cash rate by a further 50 basis points,” minutes from the most recent meeting read.

“The size and timing of future interest rate increases will continue to 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. All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.”

The RBA at its next meeting is widely expected to hike again, but opinion is divided whether it will be to 2.6 per cent, or 2.85 per cent.

With inflation set to jump from 6.1 per cent over the year to June to closer to 8 per cent by the end of this year, the minutes showed a board intent on taking strong action to return inflation back to its 2-3 per cent target over time.

But the board was also aware of the “while keeping the economy on an even keel”.

“The path to achieving this balance remains a narrow one and clouded in uncertainty,” it said.

“Members emphasised that price stability is a prerequisite for a strong economy and a sustained period of full employment,” the minutes read.

“They acknowledged that monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings.”

Making a difficult task even more so was “the outlook for global economic growth had deteriorated”.

“Central banks in several large advanced economies had expressed further resolve in tightening monetary policy to prevent high inflation from becoming entrenched, and this was likely to entail a period of significantly lower growth,” the minutes read.

“High inflation was also placing pressure on real incomes, most significantly in Europe, related to the worsening effects on energy markets following Russia’s invasion of Ukraine.

“In addition, Covid-19 containment measures and other policy challenges continued to weigh on the outlook for growth in China.

“Some slowing in the global economy would be important to returning inflation to central banks’ targets, but the potential for a sharp slowing continued to present a downside risk to the outlook.”