Australia’s central bank has signaled it’s prepared to tighten monetary policy further if inflation doesn’t moderate as expected, reversing course after a period of easing. The Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points to , , to 3.85%, a move that surprised some observers given previous signals of a potential pause in the tightening cycle.
Minutes from the RBA’s board meeting released on , revealed a growing concern among policymakers that without intervention, inflation would remain “persistently above target for too long.” This concern stemmed from stronger-than-anticipated economic growth and robust domestic demand, coupled with a surprisingly resilient global economy.
The decision to hike rates marks a significant shift in the RBA’s approach, following three rate cuts in when inflationary pressures were easing. The reversal underscores the central bank’s commitment to bringing inflation back within its target range of 2% to 3%, even if it means risking slower economic growth.
The RBA’s updated forecasts, also released alongside the minutes, now predict that inflation will not return to the target range until . This extended timeline is a key driver of the central bank’s hawkish stance. Associate Professor Stella Huangfu of the University of Sydney noted that persistent services inflation, particularly in areas like rents, insurance, health, and education, is proving particularly difficult to tame.
The minutes indicate the board acknowledged risks on both sides – to inflation and economic activity – but ultimately prioritized addressing the upside risks to inflation. Members agreed that it was still possible to bring inflation back to target while maintaining the gains made in employment in recent years. However, they emphasized the need to remain data-dependent and avoid complacency.
Several factors contributed to the RBA’s decision. Domestic demand has proven stronger than expected, and rapid gains in house prices and mortgage lending suggest that financial conditions were not as tight as previously assumed. The labor market also remains robust, with unemployment falling to 4.1% in December, alleviating concerns about a significant rise in joblessness.
Globally, the economy has demonstrated greater resilience to U.S. Tariffs than anticipated, fueled in part by a boom in investment related to artificial intelligence and data centers. This global strength is contributing to inflationary pressures worldwide.
The recent appreciation of the Australian dollar could, if sustained, contribute to tighter financial conditions, but the RBA noted that part of this appreciation was driven by market expectations of further rate hikes.
Markets are now pricing in a significant probability of another rate hike at the RBA’s May meeting, potentially pushing the cash rate to 4.10%. This expectation is based on the anticipation that the first-quarter consumer price data, due out in late April, will show core inflation remaining stubbornly high, near 3.4%. The RBA itself forecasts core inflation of 3.7% for mid- and 3.2% by Christmas.
The RBA’s decision reflects a broader trend among central banks globally, as they grapple with persistent inflation and the challenge of balancing price stability with economic growth. The minutes highlight the delicate balancing act facing policymakers as they navigate an uncertain economic landscape. The central bank’s willingness to reverse course demonstrates its commitment to achieving its inflation target, even if it requires further tightening of monetary policy.
Westpac Chief Economist Luci Ellis noted that at 3.2%, annual trimmed mean inflation is still forecast to be above target at the end of . She anticipates that temporary elements in inflation will begin to unwind later in the year, and that restrictive monetary policy will eventually take hold.
Governor Michele Bullock has previously indicated that the interest rate cutting cycle may be nearing its end, after the bank forecast inflation to exceed its target range until the second half of next year. This suggests the RBA is prepared to maintain a relatively tight monetary policy stance for the foreseeable future, prioritizing the fight against inflation over stimulating economic growth.
