As it continues its fight against inflation, the Reserve Bank of Australia says it can’t rule out further interest rate hikes. Market economists who had originally anticipated the first interest rate cut in February are now expecting a May cut, at the earliest.
At its latest meeting in November, the central bank decided to leave the official cash rate at 4.35% – a level it has been at for the past 12 months.
The RBA today released its minutes from that meeting two weeks ago — before the outcome of the US presidential election was known.
“Returning inflation to target remains the Board’s highest priority and it will do what is necessary to achieve that outcome,” the Board said in the minutes.
Based on the information then available, members agreed that it was “not possible to rule anything in or out in relation to future changes in the cash rate target”.
The central bank considered risks that could have “important implications for monetary policy,” which could result in “materially wrong” forecasts.
US, China present risks
Specifically, the RBA cited “major changes in the US economic policy following the presidential election” as a potential risk to its stance in keeping interest rates higher for longer to combat persistent inflation.
Additionally, there’s the risk that stimulus proposed by Chinese authorities might "differ from expectations".
US President-elect Donald Trump threatened throughout his campaign to impose tariffs on goods coming into America by as much as 20%, and by 60% on goods from China.
Economists say these moves could stoke inflation and discourage central banks from cutting interest rates.
However, while the minutes do not reveal any war-gaming about scenarios, members warn that would need to occur if the risks eventuated despite the "pertinent details .. being unknown and unpredictable".
However, the RBA noted that: “The implications for the Australian economy of the scenarios with limited global reaction could ultimately be quite modest because of the potential for trade flows to be redirected.”
Rates decision uncertain
The RBA board also discussed scenarios under which it might need to revise its decision to keep interest rates at 4.35%.
These include a significant decline in consumption, with spending weaker than anticipated, which could lead to the need for a cash rate reduction.
The board also considered a sharp downturn in the labour market, where an easing in conditions would reduce inflation.
Also discussed “If forward-looking indicators suggest a widespread easing in the labour market and faster inflation reduction, the RBA may need to adjust its policy.”
The RBA holds its final board meeting of the year on December 10.