Australia's central bank walking narrow path with rate hikes -minutes

Australia's central bank still sees a need for more rises in interest rates to prevent high inflation becoming baked into the expectations, but is not on a pre-set path and aims to keep the economy on an even keel.

Minutes of its August policy meeting out on Tuesday showed the Reserve Bank of Australia (RBA) Board expected further hikes to "normalise" interest rates given inflation was far above target and the labour market at its tightest in decades.

"But it is not on a pre-set path," the minutes showed. "It is seeking to do this in a way that keeps the economy on an even keel. The path to achieve this balance is a narrow one and subject to considerable uncertainty."

The central bank raised rates by 50 basis points to 1.85% at the August meeting, the fourth hike in as many months and the most aggressive tightening since the early 1990s.

The rapid action was forced by a surge in inflation past all expectations, with the central bank having to repeatedly and sharply lift its forecasts for consumer prices.

The latest prediction is that consumer price inflation will peak around 7.75% in the fourth quarter, up from 6.1% currently and levels not seen since 1990. It is not expected to slow to the top of the RBA's 2-3% target band until late 2024.

The minutes showed the Board was particularly concerned that such high levels of inflation did not become baked into wage and price expectations, and that required more rate rises.

Board members noted that the forecasts for an eventual slowdown in inflation were conditioned on rates rising to around 3% by the end of 2022.

Markets are priced for a peak around 3.5%, though are less certain on whether rates will rise by 25 or 50 basis points at the next policy meeting in September. (0#RBAWATCH)

Data out this week could decide the issue with wage growth seen picking up to a near eight-year high of 2.7% and unemployment holding at a 48-year low of 3.5%.

Indeed, the RBA said its liaison with businesses showed many were planning to jack up pay awards this year, while vacancies were still at record highs.

The Board also discussed how Australia's heavily indebted households would fare in the face of rising borrowing costs given the hikes delivered so far will add around A$560 a month in repayments to the average A$620,000 mortgage.

Households did build up around A$260 billion ($182.39 billion) in excess savings during the pandemic lockdowns, but there are early signs from bank data that spending is starting to slow.

"As mortgage repayments are reset upwards, households are expected to moderate spending further," warned Harry Ottley, an economist at CBA.

"There is a risk that the volume of household consumption contracts given inflation is running well ahead of wages growth."

($1 = 1.4255 Australian dollars)