RBA says it contemplated a 40 bp hike in May

May 17 2022
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The RBA considered a 40-basis point rate hike at its May meeting.

RBA says it contemplated a 40 bp hike in May

The Reserve Bank of Australia (RBA) considered three options for the size of the rate increase at the May board meeting – raising the cash rate by 15 basis points, 25 basis points or 40 basis points.

“Members agreed that raising the cash rate by 15 basis points was not the preferred option given that policy was very stimulatory and that it was highly probable that further rate rises would be required,” minutes from the bank’s policy meeting, published on Tuesday, read.

“A 15-basis point increase would also be inconsistent with the historical practice of changing the cash rate in increments of at least 25 basis points.

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates,” the RBA said.

Members, however, agreed that the preferred option was 25 basis points. This, the bank said, helped signal that the board “was now returning to normal operating procedures after the extraordinary period of the pandemic”.

“Given that the board meets monthly, it would have the opportunity to review the setting of interest rates again within a relatively short period of time, based on additional information.”

Earlier this month, the RBA chose to lift the cash rate from a record low of 0.1 per cent to 0.35 per cent in its first rate hike in over a decade as a result of inflation levels not seen since the introduction of the GST in 2001.

"The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic," governor Philip Lowe said at the time.

"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions," he added.

The RBA is now waiting for the March quarter data on the Wage Price Index to determine the timing and extend of future interest rate increases.

It was widely believed that the central bank would maintain its patience until this data becomes available. However, the minutes confirmed that while the bank deemed this information “helpful”, “the recent evidence on wages growth from the bank’s liaison and business surveys was clear”.

“Members agreed that the condition the board had set to increase the cash rate had been met. They also agreed that further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time,” the minutes said.

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

Currently, financial markets are pricing a policy rate of close to 2.5 per cent by year-end.

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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