Minutes From June Meeting Flesh Out Discussion Re: Size Of Hike

The minutes from the RBA’s June meeting fleshed out the thought process behind the debate re: a 25 or 50bp hike:

• “Members considered whether an increase of 50 basis points could add to the community's concerns that inflation was likely to stay high. While this was a risk, the Bank could communicate that inflation was expected to return to the target over time and that the Board was committed to this objective.”
• “The argument for an increase of 25 basis points was that a sequence of 25 basis point moves represented a steady approach to withdrawing monetary policy stimulus and that this was appropriate in an uncertain environment. Members observed that if the cash rate were to be increased by 25 basis points at each meeting over the remainder of 2022, the cash rate would be 2.1 per cent by the end of the year. In a historical context, this would be quite a rapid tightening. While some central banks had been increasing policy rates in 50 basis points increments, these central banks meet less frequently than the Reserve Bank Board. Members also noted that, over the preceding couple of decades, increases in the cash rate had typically occurred in 25 basis point increments. The previous instance of the Board having increased the cash rate by 50 basis points was in February 2000.”
• “Members also considered the evolving risks to household consumption, including how households would adjust their spending in response to higher prices and interest rates, and the impact of higher interest rates on the housing market. Housing prices had declined in some markets over preceding months, but remained more than 25 per cent higher than prior to the pandemic, thereby supporting household wealth and spending. Further, many households had built up large financial buffers during the pandemic and the household saving rate was very high. The central scenario, which was conditioned on the assumption of further rate rises, was for strong household consumption growth over the remainder of the year.”
• “Given the current inflation pressures in the economy and the still very low level of interest rates, on balance, members agreed to a 50 basis point adjustment in the cash rate target. Members also agreed that further steps would need to be taken to normalise monetary conditions in Australia over the months ahead. 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. The Board remains committed to doing what is necessary to ensure that inflation in Australia returns to the target over time.”