RBA’s unexpected call for slow rate hikes unpacked in board minutes

The direction of interest rates will be guided by the jobs and inflation numbers after the shock deceleration of monetary tightening this month.

The logic behind the Reserve Bank of Australia’s surprise decision to ease rate hikes back to 25 basis points instead of the 50 basis point hike markets had priced in is revealed in the minutes of the October Board decision.

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The central bank took its foot off the accelerator in October after four consecutive hikes of 0.5 percentage points that pushed up the cost of mortgage repayments for homeowners.

JP Morgan economists expect the minutes, when released on Tuesday, to reflect the bank’s data-driven approach to monetary decisions.

October jobs and September quarter inflation are the notable data releases ahead of November’s decision, with unemployment numbers due Thursday and quarterly CPI data coming out next week.

Westpac economists have warned that the surprise move to 25 basis points in October could have unintended consequences.

The concern is that the RBA’s decision may have boosted confidence and delayed the fall in demand, keeping inflation elevated for longer.

Westpac chief economist Bill Evans said a trend reversal in the bank’s monthly confidence survey for the month suggested consumers actually felt more confident following the RBA’s decision.

The Australian dollar’s collapse against the US dollar following the announcement could also fuel inflation, Mr Evans said.

The decision has also made a return to 50 basis points more dangerous.

“Just as we have seen confidence overreact to a positive shock, the impact of tightening more than expected is likely to be too damaging from the RBA’s perspective,” he said.

Because of this, the bank’s economists expect the tightening cycle to continue for a month, but maintain 3.6 percent as the end of the tightening cycle.

RBA Deputy Governor Michele Bullock is also set to address the Australian Finance Industry Association conference in Sydney.