RBA Minutes

The minutes to the last RBA board meeting were released yesterday. I've included the last three paragraphs below which sum up their thoughts well. The impression I get is that they will continue to tighten for the time being with a move in November and December. We and they won't really have a clear idea however until the next CPI figures are released. Many commentators are suggesting the next move will be 50 basis points. I think however that unless inflation looks like it's staying up, they'll continue with a gradual process of 25 points. This isn't the sort of environment where you want to spook people by delivering a big jump in rates.

Members noted that there was still a possibility that the recent strength in the domestic economy had been largely due to the greater-than-expected impact of the fiscal stimulus, which left open the attendant risk that activity might slow as that stimulus faded. It was also likely that the appreciation of the exchange rate would act as a contractionary influence on activity and help contain inflation. These considerations weighed in favour of keeping the current policy setting for a while longer so as to evaluate further data.
On the other hand, members judged that, compared with previous meetings, the risks in waiting had increased. In particular, underlying inflation was still, on the latest data, above the target and, while current forecasts suggested it would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought. Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term. More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth.
Overall, members concluded that, while downside risks to the domestic economy could not be ruled out, they had diminished significantly over recent months. This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent. The Board therefore decided in favour of raising the cash rate.