At its February policy meeting, the Reserve Bank of Australia (RBA) abandoned all thought of pausing its rate hike and signaled that more rate hikes would be needed. The February 7 policy meeting minutes showed that the RBA board only discussed two options: hiking by 50 or 25 basis points.
Board Settles on Quarter-Point Hike
The board settled on a quarter-point hike, bringing the cash rate to a decade-high of 3.35%. The minutes noted an uncertain global outlook, the bank's flexibility through monthly meetings, and the substantial rate increase. Rates have climbed 325 basis points since May, making it the most aggressive tightening in modern history.
Risk of Persistent High Inflation
The recent inflation data has suggested more breadth and persistence in inflation than expected, and strong demand is leading to price increases in some parts of the economy. While inflation is expected to decline, there is a risk it could persist at an uncomfortably high level, which would entail longer-term costs. Board members agreed that further increases in interest rates are likely to be needed over the months ahead, consistent with market pricing.
Hawkish Turn Surprises Investors
The hawkish turn surprised investors, who revised the expected peak for interest rates to 4.2%, compared with 3.6% in January. RBA Governor Philip Lowe doubled down on the consequences of being unable to control inflation, warning that domestically sourced cost pressures were still picking up even if consumer price inflation may have finally peaked last quarter.
Wage Growth Picks Up
Data on Wednesday could help decide how much higher rates would have to go, with wage growth picking up to a fresh eight-year high of 3.5% in the fourth quarter of last year. The RBA expects wage growth to top 4.2% by the end of this year.