On Tuesday morning, the Reserve Bank of Australia released the minutes of the November Monetary Policy Committee meeting, during which the Reserve of Australia raised the interest rate by 25 basis points to 4.35%, as market expectations were widely indicated, and the most prominent of the minutes of the meeting were the following:
- Reserve members of Australia noted that core inflation was more stable over the previous few months than previously expected.
- High inflation was underpinned by above-average highs at prices for a wide range of consumer goods and services.
- There was clear evidence that this was due to domestic pressures associated with aggregate demand exceeding total supply, especially with regard to service price inflation, which was very high.
- This power in demand was allowing companies to pass on higher labor costs and production inputs.
- Data released over the previous months indicated that domestic demand was more resilient than previously expected.
- This resilience in economic activity occurred despite interest rate increases by the Reserve of Australia over the previous eighteen months, which gradually affected sectors of the economy.
- The members of the Australian Reserve noted that other countries’ experience with inflation during the previous months was similar, and that international experience previously served as a useful guide to economic developments in Australia.
- Reserve members of Australia noted that its forecast was for inflation to fall below the target range only in late 2025, slightly later than expected in the August forecast.
- Reserve members of the Australian Reserve also noted that the unemployment rate is still expected to rise, but to a lower level than expected in August.
- The RBA believes that the real interest rate has remained lower than the official interest rates in many other countries, despite similar economic conditions, and although various factors may be responsible for difference.
Australian dollar at 3-month high after central bank minutes
In the Asian market, the Australian dollar on Tuesday saw a significant rise against a basket of global currencies, extending gains for the third consecutive day against the US dollar, hitting its highest level in three months. The rise follows the release of the minutes of the Reserve Bank of Australia’s recent monetary policy meeting, which included tighter comments than expected in the markets. This rise is expected to increase the likelihood of a 25 basis point hike in Australia’s interest rates at the December meeting, which will be the second consecutive meeting in which interest rates have been raised.
The latest movements in the Australian dollar today rose 0.50% against the US dollar to 0.6587, the highest level since August 10. The opening price of the day was 0.6557, with a low of 0.6553.
It is worth noting that the Australian dollar rose on Monday by 0.65% against the US dollar, and this is the second consecutive daily rise. The Australian dollar benefited from the continued decline in US dollar levels against a basket of major and minor currencies.
Reserve Governor Michelle Bullock said on Tuesday that inflation poses a crucial challenge to the Australian economy over the next two years. “I’m not convinced by the idea that monetary policy is no longer useful,” Pollock added. The following are the main comments of the minutes
- We have taken into account the need to raise or stabilize interest rates
- We saw that the justification for raising interest rates was strongest given the increasing risks of inflation.
- If further emphasis is needed, it will depend on data and risk assessment.
- We saw the risk of rising inflation expectations if interest rates are not raised.
Impact of the rise in long-term bond yields on Australia and other countries
Australia has less influence than some other countries as a result of rising long-term bond yields over the past months. However, the exchange rate has not changed significantly based on trading weight. The Australian Reserve estimate suggests that the ratio of household debt payments to disposable income implies that the debt repayment burden was not as high as it was 15 years ago.
RBA members note that fixed-rate borrowers prefer to take out loans at a variable rate (which cost more) without significantly affecting their ability to repay loans. The continued rise in house prices and the increase in loan approvals over the past months indicate that financial conditions continue to improve.
In terms of interest policy, the Reserve of Australia has considered the option of raising the rate by an additional 25 basis points or keeping the rate flat unchanged. The Reserve of Australia has decided to raise the interest rate by an additional 25 basis points due to rising expectations of inflation, which are stronger than they were just a few months.
Core inflation exceeded expectations in the third quarter, and inflationary pressures were evident in a variety of consumer goods, especially in items where inflation takes longer to cool down, such as services. The Reserve of Australia believes inflation will take some time to return to target.
The impact of domestic demand over the past months on inflation expectations
The high elasticity of domestic demand has had an impact on inflation expectations. The Reserve of Australia expects a smaller slowdown in GDP growth and a reduction in unemployment in the future, which could add to inflationary pressures. Strong demand for goods and services may lead to an increase in prices, affecting inflation expectations.
It is important to note that inflation forecasts are not always 100% accurate and may be influenced by multiple factors. Higher prices of commodities such as oil and raw materials may lead to higher production costs and higher prices for finished products. In addition, changes in government policies, international trade, and geopolitical events may affect inflation expectations.
In general, rising long-term bond yields can have an impact on different economies. Higher bond yields may increase borrowing costs for businesses and individuals, reducing spending and investment. In the case of Australia, the RBA is closely monitoring the impact of higher bond yields on mortgages, consumption and investment.
The central bank should make its decisions based on a comprehensive assessment of the economy, current conditions and future expectations. It is important to strike a balance between maintaining financial stability and supporting economic growth. The central bank may decide to adopt various policies such as raising or lowering interest rates or implementing quantitative easing measures to affect the economy and inflation according to current conditions.
