(Bloomberg) -- Australia’s central bank considered pausing its policy tightening cycle this month but decided against it as incoming economic data didn’t yet warrant a change of stance, minutes of the Dec. 6 meeting showed.

The Reserve Bank’s board raised interest rates by a quarter-percentage point to 3.1% two weeks ago after considering three options –- 25 basis points, 50 or a pause, the minutes released Tuesday in Sydney showed.

This is the first time during the RBA’s eight-month tightening cycle that board members put the case for no change on the table. The discussions come as a majority of economists see two more quarter-point hikes in 2023, taking the cash rate to 3.6%.

 

“The fact that they told us they considered a pause means they are pretty close to actually pausing,” said Gareth Aird at Commonwealth Bank of Australia. 

“I think there’s going to be a lot of pain to come next year and I feel like the RBA recognizes that and they want to actually stop raising rates,” said Aird, head of Australia economics at CBA. “But they’re kind of looking for something to hang it off and they haven’t got that piece of evidence just yet.”

In deciding to keep tightening, board members noted that the RBA’s most recent forecasts indicated that inflation was expected to take several years to return to the 2-3% target, even with further increases in the cash rate, the minutes showed.

“Incoming information had not warranted a reassessment of that broad outlook,” the RBA said. “Moreover, members noted that no other central bank had yet paused.”

“Members also noted the importance of acting consistently, and that shifting to either larger increases or pausing at this point with no clear impetus from the incoming data would create uncertainty about the board’s reaction function,” the minutes showed.

The RBA reiterated that it expects to increase rates further while adding that they “are not on a pre-set path.” It repeated that the size and timing of future hikes will be determined by incoming data and the outlook for inflation and employment. That provides the board with maximum flexibility to maneuver in the current cycle.

The minutes showed that members saw “considerable uncertainty” for the economy’s outlook with the timing and extent of a likely slowdown in household spending still unknown. The picture for global growth was also darkening while it wasn’t yet clear if Australia will avoid the price-wage spiral seen elsewhere around the globe.

“Recognizing this uncertainty, members noted that a range of options for the cash rate could be considered again at upcoming meetings in 2023,” the minutes showed.

The board didn’t rule out returning to half-point increases if needed or leaving the cash rate unchanged for a period to assess incoming data. The RBA reiterated that the policy lag in the current cycle was likely to be longer than in past episodes as a large number of households are still on fixed rates and unaffected by the rapid tightening to date.

The central bank expects the share of household income being spent on mortgage payments to hit near-record highs in late 2023, based on market pricing for the cash rate and existing fixed-rate mortgages rolling off.

The RBA has raised rates by 3 percentage points since May as it grapples with the fastest inflation in more than three decades. The central bank was, however, the first to break with the global trend of outsized moves, when it downshifted to quarter-point hikes in October.

“The RBA knows that our mortgage market is most directly influenced by what they do,” CBA’s Aird said. “They are worried that they may have done too much, but they also don’t want to be a central bank that stops hiking and then you have a price-wage spiral that they didn’t address.”

(Adds comments from economist.)

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