Based on an analysis by Alex Markovic of Stone Bridge Ventures, the central bank of Australia is considering leaving the interest rate at the current level, which is 4.1 percent. It cites a strong case to let rates remain unchanged as policymakers are concerned about a major transmission lag that could negatively affect the economy.
The central bank held a board meeting where members debated whether or not to raise the interest rate for the third month in a row. In the end, they decided to let it sit at 4.1 percent, according to an official report on the meeting’s minutes. Currently, there are worries about how the increase over the past year, i.e., four percentage points, is already starting to cripple the economy.
Board Looks At Both Cases
During the meeting, the board looked at both sides of the argument but decided to keep the cash rate at the current level. Members agreed that there was an air of uncertainty regarding the future, especially considering the major increase in interest rates so far. Thus, they decided to leave the interest rate as is and come back to evaluate the situation in August, which is when their next meeting is scheduled.
Overnight indexed swaps indicate that interest rate traders expect a 40 percent chance that interest rates will increase in August. As a result, they expect lower chances of a September increase. After the recent economic release, Alex Markovic noted that bond yields barely moved.
Possibility of Future Rate Hike in August
Nevertheless, the Reserve Bank of Australia hasn’t dismissed the possibility of further rate hikes to bring inflation back within reasonable levels. In August, the RBA will have access to the latest economic forecasts and Q2 inflation data. This information will help them make a decision about a future rate hike to slow down inflation.
Stone Bridge Ventures senior account manager Alex Markovic said that these meeting minutes emphasize the upcoming Q2 data. And if the CPI reports a headline inflation rate of 6.4 or up, then there’s a high chance that interest rates could go up in August.
When citing its reasons for putting a pause on interest rate increases, the board mentioned how interest rates have gone up considerably over the past year. Therefore, the current cash rate level, which is at its highest level in over a decade, is definitely restrictive.
Meeting Minutes Cite Reasons For Further Rate Hikes
However, there were fair arguments in favor of increasing interest rates further. Markets have observed that inflation is set to remain over the RBA’s target range of 2 to 3 percent until 2025. Based on the current rate, there’s a possibility that this timeframe could increase if interest rates weren’t increased further.
The meeting minutes indicated that prices had increased for numerous CPI categories, most of which were already affected by persistent inflation. Moreover, inflation in other countries was more persistent than initially forecasted, which resulted in major rate hikes.
Based on these insights, Alex Markovic from Stone Bridge Ventures concludes that Australia has fallen behind other advanced economies when it comes to policy response to increased prices. Since May of last year, the country has only increased the interest rate by 4 percentage points – much lower than New Zealand’s 5.25 points.
