Reserve Bank of Australia minutes hint at further interest rate hikes amid high inflation

The Reserve Bank has hinted at another rate rise this year because it is worried inflation will remain high until late 2028, the minutes of its last meeting have revealed.

Three of Australia’s big four banks are now expecting another rate rise in May with financial markets sharing that view.

By a unanimous decision, RBA governor Michele Bullock and her monetary policy board on February 3 raised interest rates by 25 basis points to 3.85 per cent, which marked the first increase since November 2023.

It also reversed the effects of the Reserve Bank of Australia’s August rate cut after inflation soared to 3.8 per cent at the end of last year, or an annual pace well above the RBA’s 2-3 per cent target.

The consumer price index was expected to hit a two-year high of 4.2 per cent by mid-year, with the minutes noting that high inflation was broadly based, “had increased sharply and was high by historical standards”.

“Measures of inflation expectations at the two-year horizon had increased, most noticeably in Australia,” the meeting minutes revealed on Tuesday said.

“Members discussed the likely persistence of the rise in inflation.”

Updated RBA forecasts, released early this month, showed headline and underlying inflation remaining above target until June 2027 and not returning to the mid-point of that band until late 2028.

The RBA noted financial markets were expecting another rate rise by the end of 2026.

“Market pricing had implied a 70 per cent probability of a cash rate increase at the current meeting, with a further increase fully priced by the end of 2026,” the minutes said.

“Most market economists tracked by the staff had also expected an increase in the cash rate in February, and a number had expected a second increase later in the year.”

Three of Australia’s big four banks, Commonwealth NAB and Westpac, are expecting a follow-up May increase after the release of March inflation data, with the 30-day futures market of the same view.

“The governor’s view of wanting to be patient, together with a preference for the board to receive updated staff forecasts before shifting rates again, solidify our view the next move will be in May,” the Commonwealth Bank’s head of Australian economics Belinda Allen said.

Another rate rise would undo two of the RBA’s three rate cuts last year.

Like the February 3 announcement, the RBA minutes didn’t mention the effects of high government spending, instead focusing on strong private demand and robust consumption at the end of last year during a time of low unemployment.

“Members considered the role that stronger-than-expected aggregate demand had played in adding to existing capacity pressures,” it said.

NAB customer data showed spending levels had increased by 6.6 per cent in the year ending on January 30.

Spending on utility bills had climbed by 17.6 per cent, following the discontinuation of $75 quarterly electricity rebates at the end of last year.

The amount shelled out on personal goods soared by 8.8 per cent over the year, led by toys, games, watches, jewellery and pharmaceutical products.

But the latest rate rise also dented consumer confidence with an ANZ-Roy Morgan reading, released on Tuesday, showing it at the weakest level since June 2024, when inflation last spiked to levels above the RBA target.

The reading for the week ending on February 15 was at 77.1 points, or a level well below the 100-point mark where the optimists outnumber the pessimists, based on a survey of 1,000 people.

Household spending was likely to weaken this year making a May rate rise unlikely, ANZ’s head of Australian economics Adam Boyton said.

“We therefore see the cash rate remaining at 3.85 per cent over 2026, although we acknowledge the data need to fall on the softer side to give the RBA board comfort,” he said.