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November interest rate rise was needed to avoid risk of larger future increases, RBA says

The Reserve Bank said it lifted its key interest rate this month to reduce the risk of a “larger monetary policy response” in coming months given the persistence of inflation and the stronger than expected performance of the economy.

The RBA, in its minutes released on Tuesday, also noted that its forecasts for inflation to decline to within its 2%-3% target range by the end of 2025 were based on one or possibly two more interest rate increases.

The minutes explain in more detail the reasons why the RBA opted to lift its key interest rate a 13th time in the current cycle at its 7 November meeting. The 25 basis-point increase brought the rate to 4.35%, or the highest level since late 2011.

The eight-member board considered leaving the cash rate unchanged for a fifth consecutive month noting there were uncertainties including how the “escalation of tensions in the Middle East” was “likely to dampen consumer confidence and global demand”.

The case to hike again, though, was deemed stronger in part because the RBA itself had made it clear in the previous month’s minutes and in subsequent speeches it was not prepared to accept inflation remaining too high for too long.

“Members noted that the risk of not achieving the board’s inflation target by the end of 2025 had increased and that it was appropriate that monetary policy should be adjusted to mitigate this,” the minutes showed.

“They agreed there was a risk of inflation expectations increasing [if the pause had been extended] particularly given the Board’s repeated statements that it has a low tolerance for inflation returning to target after 2025.”

The RBA earlier this month updated its quarterly forecasts, noting recent core inflation had picked up and also that the economy was performing better than expected particularly in the labour market.

At a separate event on Tuesday, RBA governor Michele Bullock described the outcome for jobs as “fabulous”, adding “I’m really optimistic we can keep these gains”.

The jobless rate ticked higher in October to 3.7% but the economy added almost 55,000 new jobs. That tally, though buoyed by a short-lived bump in Voice Referendum-related jobs, was almost triple the level expected by economists.

The RBA minutes, however, noted employment growth had slowed to around the level of population growth. The spurt in migration was an “upside surprise” but its “net effects” on inflation had been largely offset as it boosted both demand and supply in the economy albeit “varied across sectors”. Higher rents, reaching an annualised pace of 10%, was one of the factors contributing to price pressures, the minutes noted.

Consumer spending, while weak, has been supported by an expected rebound in home prices in 2023, boosting many households’ sense of wealth. This month’s rate rise, however, and falling auction clearance rates as more homes come on to the market may taper or even reverse some of the recent price spurts, analysts say.

The minutes noted that the consumption boost from the wealth effect may possibly be lower than in the past “given the low rates of housing turnover and credit growth”.

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The RBA will receive an update on inflation next week when the Australian Bureau of Statistics releases its October figures. Most investors are predicting the bank will leave the cash rate unchanged at its final rates meeting for 2023 on 5 December.

The board noted that some households were already experiencing “a financial squeeze on their finances” even before this month’s interest rate increase.

However, while more borrowers than usual were drawing down funds in their offset accounts, banks had not seen “a significant rise in the incidence of households experiencing difficulties making their mortgage payments”.

Those shifting from low fixed-rate mortgages to higher variable ones as their terms expire were also doing so “without a noticeable adverse effect on their ability to service their loans”, the minutes said.

And while the RBA had lifted borrowing costs by 400 basis points since last May – now at 425bp after the 7 November increase, competition between commercial banks meant that the average outstanding variable home loan rate had increased by 330bp by that point.

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