Reserve Bank hints at June interest rate hike

PHOTO: The Reserve Bank. FILE

The Reserve Bank has confirmed that it was considering a sharper rise in interest rates at its May meeting.

But it settled on a “normal” 25 basis point rise (0.25 percentage points) because it would meet again in a month, a strong hint it will hike again in June.

Minutes of this month’s meeting showed the RBA board also considered hiking by 40 basis points.

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However, it decided to move by 25 basis points to 0.35 per cent, since this would mark a return to “normal operating procedures”.

“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,” the minutes showed.

“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 market took that as a clear sign it would hike again at its June 7 meeting, and probably by 25 basis points.

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‘Inflation psychology’

Futures markets are now betting the cash rate target will lift to 0.60 per cent in June, and already have rates reaching 2.75 per cent by year end.

If correct, that would be one of the most aggressive tightening cycles in recent history and a serious burden to households who hold a record $2 trillion in mortgage debt.

The RBA’s sudden shift on policy followed data showing inflation surged to 20-year peaks in the first quarter as energy, building, health and food costs all ballooned.

Core inflation shot to 3.7 per cent, the highest since 2009 and uncomfortably far above the RBA’s 2 to 3 per cent target band.

Indeed, the central bank now expects core inflation to stay above the band until 2024, underlining the scale of the policy task ahead.

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“Members observed that it would be more difficult to return inflation to the target if the inflation psychology in Australia were to shift in an enduring way,” the minutes showed.

In deciding whether the June rate increase will be a normal (25 basis point) or larger move (40 basis points), the RBA will be closely watching this week’s March-quarter wage figures (published on Wednesday) and April employment numbers (on Thursday).

Commonwealth Bank economist Belinda Allen said the RBA will probably opt for the larger rate hike if wages growth is “stronger than expected” (a quarterly jump of 0.9 per cent or above), or if the jobless rate is below 3.8 per cent.