SYDNEY: Australia’s central bank raised its key interest rate two weeks ago because upside risks to inflation were coming to pass and waiting could prove costly, while adding the outlook would be heavily influenced by the ongoing conflict in the Middle East.
“Members discussed the challenges of judging how large the upside risks to inflation were or could become,” the Reserve Bank of Australia (RBA) said in minutes of its September meeting released yesterday, after raising the key rate to 4.6%.
The board will do what’s needed to meet its mandate, “including increasing the cash rate target further if required”.
The central bank’s board, in discussing a hike, also pointed out that while Australia began tightening earlier than counterparts, future trends in interest rates in Australia relative to other countries would also have a bearing on the exchange rate, with implications for domestic inflation.
The RBA has run the most aggressive tightening campaign among developed world central banks this year, increasing borrowing costs by one percentage point as it tries to rein in elevated inflation.
Australia had been struggling with renewed price pressures since late last year and began raising the cash rate even before the US-Israeli attack on Iran unleashed a global energy shock.
Traders priced about a one-in-three chance of an RBA hike in November, climbing to a bit over 50% odds in December, with the likelihood increasing further next year, ahead of the release of the minutes.
The RBA set out three key reasons for its decision to hike late last month
Since the meeting, the Middle East conflict is threatening to expand further as a barrage of drone and missile attacks on Saudi Arabia has intensified pressure on the United States to step up efforts to help its close ally battle Iran-backed Houthi militants in Yemen.
That’s given renewed impetus to oil prices and inflationary pressures.
The RBA acknowledged that the trade-off between inflation and full employment had deteriorated, while maintaining its goal was to return consumer price index to the 2% to 3% target while holding onto as many job gains as possible.
“However, executing this strategy in an environment of more persistent adverse supply shocks would require accepting slower growth in demand and employment than would otherwise be the case,” the RBA said.
“Members added that the board’s task was to stabilise medium-term inflation at the target even if part of the medium-term persistence in inflation is driven by factors beyond the influence of monetary policy.”
In a brief summary of the case to stand pat last month, the RBA noted this rested primarily on downside risks to employment and activity being larger than expected. One reason for this might be “if members judged that falling house prices could have a larger effect on household spending than assumed”.
Australia’s housing market slump is deepening, with national prices in September retreating to levels last recorded a year ago due to weak demand from buyers.
Consumer confidence is also tumbling as households struggle with high borrowing costs, rising fuel prices and persistently strong inflation. — Bloomberg
