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Reserve Bank of Australia board considered 40-basis point rate hike for May before choosing zero.25computer rise

Official interest rates hitting 0.75 per cent is firmly in play next month, with economists expecting the Reserve Bank of Australia to move by 40 basis points if Wednesday’s wages data shows strong growth.

The RBA board this month considered such a jump, minutes of its May 3 board meeting released on Tuesday reveal, but decided it had time on its side in case its 25 basis point hike did not have the desired effect.

Official interest rates are now 0.35 per cent after the RBA two weeks ago increased them from the historic low of 0.1 per cent. The minutes reveal the RBA is expecting more hikes to come — this month’s was the first since November 2010.

Rates were 0.75 per cent from October 2019 and March 2020 before the RBA began its emergency tightening measures to deal with the pandemic.

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates,” the minutes read — suggesting a 40 basis point increase remains in play for June, though RBA governor Philip Lowe referred earlier this month to the 25-basis point hike as a return to “business as usual”.

Westpac expects the RBA to push rates up 40 basis points to 0.75 per cent next month and eventually hitting 2.25 per cent next year.

Chief economist Bill Evans said it would be easier to increase rates by larger amounts earlier than later, particularly as the RBA pursues “neutral” rates — essentially putting the economy into equilibrium.

“The mere discussion of a 40 basis point move means it cannot be ruled out,” Commonwealth Bank senior economist Belinda Allen said. “The RBA has shown from the decision in May that they are willing to change the play book based on the … data.”

Chief among the RBA’s challenges: inflation is now at 5.1 per cent, well above its target of being “sustainably” between 2 and 3 per cent. Dr Lowe had maintained the board would wait for the evidence on wages growth.

That was widely thought to mean the RBA would not increase rates until June because of impending ABS data on wages price growth — which is due on Wednesday.

Instead the RBA relied on consistent data from its liaison program, with businesses reporting consistently higher wages being paid.

“Members (of the board) 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 read.

Ms Allen said the RBA minutes did not suggest any set course about how high and how quickly rates would move. She said a 0.9 per cent increase or more in Wednesday’s wages price index would likely boost the case for a 40 basis point rise.

ANZ head of Australian economics David Plank said one per cent quarterly growth in Wednesday’s data “could be enough to get the RBA over the line” for a 40 basis point rise, though did not believe his forecast 0.8 rise was sufficient.

But surprises in Thursday’s labour force figures and the June 1 national accounts could be enough to sway the RBA to go up to 0.75 per cent without strong wages growth.

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