MNI BRIEF: Bigger RBA Rate Hike To Address "Inflation Mindset"

The Reserve Bank of Australia opted for a larger 50 basis point interest rate hike in June because it wanted to “mitigate” the risk of higher inflation expectations, and because interest rates were still very low and stimulatory.

The comments come from the minutes of the RBA’s June board meeting released on Tuesday, where the central bank surprised with a 50bps rise to take official rates to 0.85%, (See: MNI STATE OF PLAY: RBA Turns Hawk In Biggest Hike Since 2000).

The minutes show the board also considered a 25bps rise, but chose the bigger hike to address the “inflation mindset.”

“In such an environment, there is a heightened risk of persistently high inflation, especially if expectations of higher inflation become entrenched,” the minutes said, pointing out that if this were to occur the chance of returning inflation – forecast to peak at around 7% in the further quarter - to the 2% to 3% target “would become more difficult.”