RBA was considering a bigger hike in cash rates | Liverpool City Champion

Minutes of the Reserve Bank of Australia’s board meeting in May indicated that it is prepared to raise the exchange rate in larger increments to bring inflation under control if necessary.

Such a warning will do little to assuage already crumbling consumer confidence, which has fallen to its lowest level since mid-August 2020.

The RBA’s May meeting approved a cash rate hike to 0.35% from a record high of 0.1% following a spike in annual inflation to 5.1%, the fastest pace fast since the introduction of the GST in 2000/01.

The minutes show that three options were discussed at the meeting as to the size of the first hike in more than a decade – 15, 25 and 40 basis points.

In the end, members agreed that 25 basis points would help signal that the board was now returning to normal operating procedures after the extraordinary period of the pandemic.

“A case for a 40 basis point hike could be made given the upside risks to inflation and the current very low level of interest rates,” the minutes said.

Economists expect the RBA to hike the cash rate by 25 basis points at its June meeting, assuming Wednesday’s wage growth figures match expectations – an increase of 0.8% for the March quarter for an annual increase of 2.5%.

“A strong upside surprise could cause the RBA to consider a bigger hike,” said Tapas Strickland, an economist at National Australia Bank.

But he thought it was more likely at the August board meeting following a strong inflation outcome expected for the June quarter, due on July 27.

Minutes released on Tuesday show that the RBA board believed there was a risk that inflationary pressures would worsen further had it waited longer to raise the cash rate.

“Members observed that it would be more difficult to bring inflation back to target if the psychology of inflation in Australia were to change in a lasting way,” the minutes read.

The minutes indicate that the significant rise in inflation was largely the result of global factors, which were likely to have a more temporary effect.

“(But) the flow of inflation and wage information over the previous month had been consistent with more persistent inflationary pressures stemming from limited spare capacity in the domestic economy,” the minutes say.

As such, the board members agreed that the conditions the board had set to increase the cash rate had been met.

“They also agreed that further interest rate increases would likely be needed to ensure inflation in Australia returned to target over time,” the minutes read.

“In making its decisions, the board agreed that it would continue to be guided by inflation and labor market evidence, while noting that significant uncertainties remain.”

Meanwhile, consumer confidence fell further last week as pressures on the cost of living continued to mount, not helped by another rise in gasoline prices.

ANZ-Roy Morgan consumer confidence – a guide to future household spending – fell another 1.3% to 89.3, its fourth consecutive weekly decline.

“Cost of living concerns are front and center for consumers,” said David Plank, Australian economics chief at ANZ.

Worries about the outlook for interest rates are weighing particularly heavily on respondents who are repaying a mortgage, among whom confidence fell a further 0.6% for a cumulative decline of 14.7% over the past three weeks.

Australian Associated Press

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