Key Points
- The Reserve Bank is keeping its options open going into the new year, minutes from its December meeting show.
- At the meeting, the central bank board considered a pause, a quarter of a percentage point hike and a larger half a percentage point lift.
- The central bank ultimately decided on quarter of a percentage lift to the official cash rate in December.
The Reserve Bank of Australia (RBA) is keeping its options open going into the new year as the gloomy global outlook, confusing spending behaviour and the threat of a wage-price spiral continue to complicate its efforts to reduce inflation.
At its last meeting in December, the central bank board considered a pause, a quarter of a percentage point hike and a larger half a percentage point point lift as possible options.
The central bank ultimately in its bid to reduce inflation that was still "too high".
In the minutes from the December meeting, released on Tuesday, board members again pointed to the lagging effect of rate hikes on economic activity.
Despite the delayed impact of rate hikes, board members said it was still too early to stop rate increases given it would take "several years" to return inflation to the target range of 2-3 per cent and there was no new evidence to the contrary.
The board also said no other central bank had stopped hiking rates yet.
First official consideration of a pause
But as observed by JP Morgan chief economist Ben Jarman, the December meeting marked the first active consideration of a pause.
"Previous decisions have been between 25bp [basis points - a quarter of a percentage point] and 50bp [half a percentage point] only, so officially considering a pause is a significant step, but one moderated by keeping 50bp on the table," he said.
In support of a half a percentage point hike, RBA board members said the possibility of strong wages growth triggered by the enduringly tight labour market was a key point of concern.
"Australia was not yet in such a situation, but the inflation mindset was shifting, with firms more willing to put up prices than a year earlier and upside risks to wages growth potentially building."
The board members were also mindful of "acting consistently" to maintain confidence in the central bank's handling of inflationary pressures.
What might happen into the new year?
For policy setting into the new year, the board did not rule out any options, but Mr Jarman thinks the RBA is close to a pause.
"The share of household income being spent on required mortgage payments would reach all-time highs in late 2023 ... which clearly imposes significant further drag from here."
