Australia’s central bank hiked rates for fear inflation was becoming entrenched

SYDNEY, June 20 (Reuters) – Australia’s central bank’s decision to hike interest rates in June was “finely balanced” but judged necessary to ensure high inflation did not become embedded in wage and price expectations.

Minutes of its June 4 policy meeting released on Tuesday showed the Reserve Bank of Australia (RBA) board considered leaving rates unchanged given consumer spending was clearly slowing, but felt the risks to inflation had shifted to the upside.

“Members recognised the strength of both sets of arguments, concluding that the arguments were finely balanced,” the minutes showed. “They judged, though, that the case to raise the cash rate at this meeting was the stronger one.”

The bank lifted its cash rate a quarter point to 4.1%, marking 12 hikes in 13 months and surprising some in financial markets who had looked for a pause.

The hawkish outlook was underlined by a surprisingly strong jobs report for May released last week, leading futures to price in a top for rates around 4.6%, compared to 3.85% just a few months ago.

The minutes devoted much space to the arguments for an immediate hike, including rising electricity prices, high rents, stubborn services inflation and a rebound in national house prices.

Headline inflation is still running hot at 7.0% while unemployment is down near 50-year lows of 3.6% and stoking wage pressures.

Low productivity and rising wages was a particular worry, with the board noting that a recent national award for low-paid workers had been higher than expected.

“Members discussed the possibility of implicit indexation of wages to past high inflation and the potential for this to become widespread,” the minutes showed.

“Similarly, members observed that some firms were indexing their prices, either implicitly or directly, to past inflation.”

This behaviour raised the risk that inflation would not return to the RBA’s 2-3% target band in a “reasonable timeframe”, the minutes showed.

(Reporting by Wayne Cole)