Inflation Concerns At The Fore, More Hikes Ahead But Likely At 25bp Pace

The minutes of the RBA’s February meeting showed that the discussion was around whether to hike 25bp or 50bp, there was no mention of a pause. The Board had also been surprised by price and wage data to the upside. The statement following the meeting that there would be more “increases” in rates came from the rate assumption of 3.75% which was needed to return inflation to 3% by mid-2025. A further 25bp hike is expected at the March 7 meeting but that is highly unlikely to be the last.

• The RBA noted that inflation probably peaked in Q4 but admitted that it was currently too early to confirm that. While global drivers continued to be mentioned, it also observed that there was more “breadth and persistence in inflation” and that the risk was that high inflation would “persist”. Inflation remains a key concern.
• The arguments for a 50bp hike included higher than expected inflation and wages and thus the risk that it would become entrenched and push up inflation expectations.
• In the end, it was decided to hike by the lower 25bp due significant uncertainty, the frequency of meetings allowing for constant re-evaluation, substantial tightening to date, inflation had likely peaked, real household income weakness and the expected consumption slowdown.
• The Board had also discussed different consumer and inflation scenarios in both directions. It noted that mortgage payments are expected to reach their highest share of disposable income on record but that savings buffers were “very large” and more than in other countries.
• While growth is expected to slow further, the minutes observe that Australia is likely to benefit more than many other countries from China’s reopening.
• See the February minutes here.