Minutes released by the Reserve Bank indicate that further cash rate hikes will be needed to quell inflation, a day after the Assistant Governor flagged the board would “respond as necessary”.
The Reserve Bank of Australia has flagged more cash rate hikes will be introduced in the coming months.
Minutes released on Tuesday from the March 7 decision, which saw the cash rate lifted to 3.6 per cent, outlined the priority of bringing inflation down to its target of two to three per cent.
“Turning to the outlook for interest rates, members observed that further tightening of monetary policy would likely be required to ensure that inflation returns to target and that the current period of high inflation is only temporary,” the minutes said.
“While it was viewed as likely that headline inflation had peaked at the end of 2022, core inflation remained too high.
“Members noted that the staff’s most recent forecasts were for inflation to return to the 2–3 per cent target only by mid-2025, and this was on the assumption that the cash rate is increased a little further.”
However, the board also discussed the lags associated with each rate rise, hinting the pauses could occur to assess the effects each one has on the broader economy.
“Members noted that monetary policy was in restrictive territory and that the economic outlook was uncertain,” it said.
“These considerations meant that it would be appropriate at some point to hold the cash rate steady, to assess more fully the effect of the interest rate increases to date.
We have released the minutes of the March 2023 Monetary Policy Meeting of the Reserve Bank Board – https://t.co/H9SJtKzSNW
“As part of their deliberations, members discussed the lags in the effect of monetary policy and the cumulative impact of the significant increase in interest rates since May 2022.
“They noted that these lags complicate the task of assessing the outlook for the economy.”
RBA Governor Philip Lowe also suggested that pauses could be coming sooner than anticipated, shortly after the March hike announcement.
“As you increase interest rates higher, you get closer to the point where it is appropriate to stop and for a while and assess the flow of data,” Dr Lowe said at the time.
“We’ve done a lot in a short period and at some point it will be appropriate to sit still and assess it.”
On Monday the RBA’s Assistant Governor Chris Kent pre-empted comments made in the minutes, saying it would “respond as necessary” to address inflation.
“Only about 45 per cent of the rise in the cash rate to date had passed through to total scheduled mortgage payments at the end of 2022, though slightly more will have passed through in the early months of this year,” he said during a speech.
“The board will respond as necessary to bring inflation back to target in a reasonable time.
“This will benefit all Australians, as high inflation imposes a significant burden on all of us, those with a mortgage, those with savings, and the most vulnerable that have neither.”
Despite the pressure on homeowners, Dr Lowe warned that Australia faced far greater economic consequences if the economy doesn’t return to an optimal inflation rate soon.
“(High inflation) erodes the value of people’s savings, puts pressure on household budgets and it hurts people on low incomes the most. The economy simply doesn’t work well if we have high inflation,” he said.
Since the RBA started lifting the cash rate from the historic low of 0.1 per cent in May last year, the cumulative monthly increase for a $500,000 mortgage has hit $983.
The next decision on monetary policy will be announced on April 4.
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