December 3, 2022

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Australia’s central bank held on to a smaller hike as it warned of falling house prices. From Health & Fitness Journal

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©Health & Fitness Journal. FILE PHOTO: An excavator stands at the construction site of a block of flats in the suburb of Epping, Sydney, Australia February 1, 2019. Picture taken February 1, 2019. REUTERS/Tom Westbrook/File Photo

Australia’s central bank expects to raise interest rates further in the coming period, but stayed on a smaller hike this month, partly on concerns that falling house prices could hurt consumer spending and the value of consistent action.

Minutes from Tuesday’s Nov. 1 monetary policy meeting showed that the Reserve Bank of Australia’s (RBA) board was again considering raising either 25 basis points or 50 basis points to bring inflation back to its 2-3% target range bring, but the arguments for a smaller migration prevailed.

The RBA board noted that rates had already risen 275 basis points since May to a nine-year high of 2.85%, and much of that had yet to go into mortgage payments.

While consumption has held up so far, the tightening has hit house prices, which the bank says based on past experience would likely have a major impact on consumer spending.

Other arguments in favor of a smaller hike include still weak wage growth, some easing in global supply chain woes, a fall in commodity prices and the impact of synchronized global tightening, which will ease inflationary pressures in the period ahead.

“The Board agreed that consistent action would increase confidence in the monetary policy framework among financial market participants and the wider community,” the minutes read.

However, the board, determined to bring inflation back on target, did not rule out a return to larger hikes when the situation warranted it and, conversely, stands ready to leave rates unchanged for a period while he does if necessary based on the economic situation.

“Interest rates are not on a preset path,” the minutes showed.

The central bank is aware that one risk to the inflation outlook was the possibility that price and wage-setting behavior would change, with wage growth likely to pick up further as unemployment rates hovered around the lowest level in almost 50 years.

Australia is due to release its third-quarter wage growth numbers on Wednesday, with analysts expecting wages to likely rise 3% yoy, up from 2.6% in the previous quarter, on the back of an increase in the minimum wage.

Markets are learning towards another quarter point hike at the next monetary policy meeting in December, but implying around a 25% chance that the RBA could remain stable. Interest rates will peak at around 3.7% by July next year.

The Board also expects to continue raising interest rates in the period ahead in order to achieve a more sustainable balance between supply and demand in the Australian economy.

RBA Deputy Governor Michele Bullock on Thursday said it could be nearing the point where it could potentially “sit and wait” to hike interest rates, but needed more evidence demand was slowing as requested.

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