RBA may raise interest rate by 0.5% in February.

It has been revealed that the Reserve Bank considered a larger 50 basis point interest rate hike in February in order to combat persistent inflation. The central bank’s board debated the 25-point increase to the official cash rate as well as the larger one, but ultimately chose the smaller rise. Not discussing leaving the rate unchanged was considered, even though members had thought about pausing it in December.

The board decided that there was less need for 50bps hikes since interest rates had already been raised considerably from 0.1 percent in April last year, and the official cash rate is now at 3.35 percent. In addition, board members noted that inflation had probably reached its peak after 7.8 percent in the December quarter, and there was a strong outlook for decreasing consumption growth.

However, the board considered another large hike due to inflation and wage data that was consistently higher than expected, as well as the danger of sticky inflation. Governor Philip Lowe was questioned about the central bank’s monetary policy trajectory during two parliamentary hearings, and he said that the inflation rate was still “way too high” and the cash rate was unlikely at its peak.

The February decision had a negative effect on consumer confidence, but the index gained some ground last week. ANZ and Roy Morgan’s consumer confidence survey increased 2.3 points to 80.4, rising in all five mainland states. The lead-up and aftermath of the 25 basis point increase to the official cash rate in February caused the index to drop 8.7 points over two weeks. Despite the slight improvement, ANZ senior economist Adelaide Timbrell said confidence was still lower than before the February decision. Four of the five confidence subindices increased, with “current financial conditions” rising 4.9 points and “time to buy a major household item” increasing 5.7 points. However, “weekly inflation expectations” decreased 0.4 points to 5.1 percent, which Ms Timbrell said could be a delayed response to higher interest rate hikes.