RBA reveals reason behind November rate hike

The November monetary policy meeting saw the Reserve Bank of Australia (RBA) increase the official cash rate by 0.25 bps to 4.35 per cent, breaking the four consecutive cash rate holds.

The minutes from the latest monetary policy meeting revealed that the case to raise the official cash rate “centred on the risks arising from the outlook for inflation being stronger than it had been some months earlier”.

The RBA said: “Members noted that underlying inflation in the September quarter had been higher than previously expected, inflationary pressures were evident across a broad range of consumer items, and inflation was most apparent in items for which inflation typically took longer to subside (such as services).

“Collectively, these observations implied that it would take some time for inflation to return to target.”

The RBA added that the risk of not achieving the inflation target of 2–3 per cent by 2025 had increased and found that it was appropriate that “monetary policy should be adjusted to mitigate this risk”.

“They observed that delaying such an adjustment would create a risk that a larger monetary policy response might be required in coming months, especially if inflation pressures turned out to be stronger than expected,” the board stated.

Additionally, members noted that broader estimates of required household debt repayments as a share of disposable income “implied that the debt repayment burden was not as high as it had been 15 years earlier”.

The central bank revealed in its latest Statement on Monetary Policy that scheduled mortgage repayments were projected to increase to approximately 10.5 per cent of household disposable income by the end of 2024 based on the increases to the cash rate to date.

“More generally, members noted that fixed-rate borrowers were tending to roll onto (more expensive) variable-rate loans without a noticeable adverse effect on their ability to service their loans,” the RBA stated.

“At the same time, housing prices were continuing to rise and loan approvals had increased over prior months, both of which might indicate that financial conditions are not especially restrictive.”

However, the RBA discussed the various implications of raising the cash rate would have on household finances and acknowledged that while there were households benefiting from climbing house prices, significant savings buffers and higher interest income, other households were “experiencing a painful squeeze on their finances”.

Nevertheless, the board decided that these finance pressures would only be exacerbated by inflation remaining higher and longer.

ANZ senior economist Blair Chapman noted the central bank’s “hawkish tone” reflected a “sharper focus on risk management along with a data-dependent approach”.

“With the next quarterly CPI release not until late January and the most recent wage and labour force data impacted by temporary factors, our view is that the RBA will wait until February before considering hiking again, with additional data informing an updated set of forecasts to be presented to the Board at that meeting,” Mr Chapman said.

“We continue to expect the cash rate to remain at 4.35 per cent, although risks remain tilted to the upside.”

Commonwealth Bank of Australia (CBA) senior economist Belinda Allen echoed the sentiment that there would be no more hikes to the official cash rate due to the early pulse of inflation data in 4Q23 to date.

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