SYDNEY, May 19 (Reuters) – Australia’s central bank judged interest rates to be restrictive after three hikes this year, giving it space to watch how the Iran war plays out even though inflation is set to trend higher and economic growth to slow.
Minutes of the Reserve Bank of Australia’s May board meeting released on Tuesday showed the policy board discussed two cases of either holding the interest rates steady or raising by 25 basis points to 4.35%, so fully reversing the amount of policy easing made in 2025.
Eight of the nine members judged the case for a hike was a stronger one, given risks to inflation had risen as the Middle East conflict dragged on and they were not confident that a cash rate at 4.1% was high enough to mitigate the risks.
“Members judged that, while it was still uncertain, financial conditions would probably be somewhat restrictrive after this decision,” said the board, adding that this would give it space to see how businesses and households respond to the Middle East conflict.
Members agreed to closely monitor economic data and evolving risks for future decisions, but noted monetary policy could not alter the near-term trajectory of inflation and output growth would be likely lower than potential growth for some time.
One member that voted against the hike judged the risk of a prolonged conflict would weigh more heavily on demand and there was not enough evidence as yet to be concerned about longer-term inflation expectations becoming less anchored.
Markets are wagering on another rate hike in August, which is about 75% priced in. Rates are seen peaking at 4.60%, with some chance of reaching 4.85%.
The RBA’s baseline forecasts were based on the Strait of Hormuz being reopened soon, something which still looks distant.
Brent crude futures hovered around $110 a barrel on Tuesday after President Donald Trump said he had paused a planned attack against Iran to allow for negotiations to take place after Iran sent a new peace proposal to Washington.
The RBA board also discussed a framework for additional monetary policy tools being developed to bolster the central bank’s readiness to conduct monetary policy if interest rates fall to very low levels again.
(Reporting by Stella Qiu, editing by Wayne Cole)
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