(Bloomberg) -- Australia’s central bank considered raising interest rates two weeks ago before deciding the case to stand pat was “stronger,” while again signaling it’s prepared to tighten further should inflation take too long to return to target.

The Reserve Bank left its benchmark rate at a 12-year high of 4.35% as it awaits data on the economy and inflation, minutes of the Dec. 5 meeting showed Tuesday. Members pointed to the possibility of a larger rise than anticipated in the unemployment rate – currently a very low 3.9% — with households already experiencing a “painful squeeze” on their finances.

“Members agreed there was sufficient value in waiting for further data to assess how the balance of risks was evolving and how best to balance these risks when setting policy,” the minutes showed. “They noted that there had been encouraging signs of progress towards the board’s objectives and that this needed to continue.” 

The minutes cover a meeting held before a significant shift in global market sentiment toward policy easing next year, spurred on by a dovish pivot by the Federal Reserve. Australia’s benchmark rate is lower than many other developed nations despite inflation being higher. Its 4.25 points of hikes in the current tightening campaign trail both the US and New Zealand’s 5.25 points.

Most economists and money markets believe the RBA is all but done with rate hikes and the next move will be down, though an easing cycle is unlikely to begin in a hurry.

Yet the RBA persisted with its hawkish bias.

“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks,” according to the minutes. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

The RBA said in the minutes that the case to raise rates centered on the risk that inflation might prove stickier than anticipated and take more than two years to fall back within the 2-3% target. Inflation is increasingly being driven by domestic demand, which is still running above a level consistent with the inflation target, the central bank said.

In addition, the bank’s most recent forecasts show inflation returning to the top of the target only by end-2025, rather than the mid-point as stipulated in the latest agreement between Governor Michele Bullock and Treasurer Jim Chalmers.

Separately, board members also reviewed the RBA’s approach to its government bond holdings that were bolstered at the height of the pandemic to provide economic stimulus. Members decided that the current approach, allowing the notes to mature, was “appropriate but agreed to keep this under active consideration.”

Any future decision to actively sell down its holdings would involve working closely with the government’s debt manager – the Australian Office of Financial Management – to avoid market disruption, the minutes showed.

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