The Reserve Bank has revealed its decision to pause its aggressive interest-rate-hiking strategy was a close call, while warning that more hikes may be needed to tame inflation.
In the minutes from its April 4 meeting, where the cash rate was left at 3.6 per cent after 10 consecutive rate hikes, board members debated the case to impose another 0.25-percentage-point increase, noting that inflation "remained too high" with the labour market "very tight".
It was argued that forecasts for inflation not to return to the 2 to 3 per cent target band until mid-2025 were inconsistent with the board's mandate to tolerate a slower return to the zone.
"Members considered the argument that … it was better to continue to raise interest rates to ensure inflation is brought back to target faster," the minutes noted.
"Monetary policy could be eased quickly if an adverse shock caused inflation and economic activity to slow more rapidly than forecast."
In addition, an upgrade in projections to population growth raised concerns about "significant pressure" on demand, especially for housing, "which in turn could manifest in higher consumer prices".
"Although higher immigration might reduce wage pressures … members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period."
The minutes also show jitters about an increased risk of larger wage increases in parts of the economy, including the public sector.
RBA's wait and see
However, the board ultimately decided to "pause" after 10 consecutive increases since May 2022 because policy had been "tightened significantly in a short period".
The board agreed on a wait and see approach given that the "full effects … on the economy are yet to be observed given the lags in the transmission of monetary policy".
Members noted the rate rises had contributed to a slowdown in the housing market, a material slowing in consumption and "financial pressure for a segment of households with housing loans".
However, the minutes also highlighted a commitment from the RBA board to do whatever it took to tame inflation, warning that more rate hikes were possible.
"Members observed it was important to be clear that monetary policy might need to be tightened at subsequent meetings and that the purpose of pausing at this meeting was to allow time to gather more information."
A potential trigger for a review of the pause is next week's quarterly Consumer Price Index (CPI) inflation reading, which will be "valuable in reassessing the economic outlook and the extent to which monetary policy would need to be tightened further".
While global developments weigh on future cash rate decisions, the board said concerns about the stability of banks in the US and Europe were not a factor in the decision to freeze rates.
"The strength of the Australian banking sector meant that financial system resilience was not a consideration in the decision to pause," the minutes noted.
NZ is facing its own fixed 'mortgage cliff' and it might hold lessons for the RBA
The Reserve Bank may also be casting an eye across the ditch to New Zealand, where the central bank already has its cash rate target set at 5.25 per cent, and is expected to raise it further.
New Zealand has an even bigger fixed rate mortgage "cliff" than Australia, with around 90 per cent of borrowers fixing their rates for terms between six months and five years.
ANZ's chief economist in New Zealand Sharon Zollner said about half of those fixed mortgages will be rolling off this year.
"Some of those are rolling on to rates that are closer to a tripling than doubling, so there's some pretty hefty increases," she told ABC News.
"Partly offsetting that, we've had very strong income growth over the last year or two as well. But if anyone has a very large mortgage, then they're definitely feeling the pinch in terms of cash flow."
Figures out on Tuesday from Centrix show an increasing number of Kiwis are falling behind on their mortgage repayments, with the arrears rate up 23 per cent over the past year to 1.29 per cent.
Ms Zollner said that is not a concern, as it is still below the average levels seen prior to the pandemic, with arrears plunging from 2020-2022.
She also noted the Reserve Bank of New Zealand's moves to tighten lending standards during its housing boom, in contrast to Australian bank regulator APRA's move to relax mortgage lending buffers in mid-2019.
"Over recent years, we have had loan to value restrictions, for example, in place from the Reserve Bank, banks have been pretty prudent with their lending," Ms Zollner observed.
"So that shouldn't be a large proportion of mortgage holders who find themselves in trouble for that reason [that they cannot afford higher interest costs]."
Instead, she believes a rise in unemployment poses a greater threat of surging mortgage arrears.
"What we tend to find is that mortgage arrears lift when the unemployment rate rises and, at the moment, the unemployment rate is still pretty close to record lows," she argued.
"But the Reserve Bank is forecasting, indeed one could say requiring, it to rise pretty rapidly over the next 12 months as part of its efforts to bring inflation down.
"And so one would expect that that will result in an increase in arrears as recessions always do."
Unlike the RBA, the RBNZ is forecasting a recession will be necessary to bring inflation back down to its target.
It is already halfway there, with gross domestic product shrinking 0.6 per cent in the December quarter.
Australia's Reserve Bank is still trying to tread a "narrow path" to getting inflation back down without a recession.
Its next step will be the board's meeting on May 2, which will be closely watched, with money markets still tipping a continued pause in rates but now pricing in close to a 30 per cent risk of another increase.
