Australian shares bounce;  RBA governor warns of higher interest rates;  Westpac 0m tier 1;  Stockland .6¢ distribution;  Dutch reopen coal power doors;  oil bounces;  $To be firmed.

Australian shares bounce; RBA governor warns of higher interest rates; Westpac $750m tier 1; Stockland $14.6¢ distribution; Dutch reopen coal power doors; oil bounces; $To be firmed.

The Reserve Bank of Australia considered two options for the size of the cash rate increase in June: raising the cash rate target a quarter percentage point or by a half percentage point. Members noted both options would leave the cash rate below 1 per cent, which would still be highly stimulatory, and that further increases would be required.

Minutes of the June policy meeting suggested the main argument for an increase of 50 basis points was that the level of interest rates was still very low for an economy with a tight labor market and facing a period of higher inflation.

Additionally, the inflation mindset in Australia appeared to be shifting. Companies had become more willing to pass on cost increases to consumers and, in a tight labor market, employees were demanding higher wages as compensation for higher living costs.

In such an environment, there is a heightened risk of persistently high inflation, especially if expectations of higher inflation become entrenched. If that were to occur, the task of returning inflation to the target would become more difficult and come at a higher cost in terms of lower levels of economic activity and employment. Raising the cash rate by a half percentage point at the current meeting would help to mitigate this risk.

The argument for an increase of 25 basis points was that a sequence of 25 basis point moves represented a steady approach to withdrawing monetary policy stimulus and that this was appropriate in an uncertain environment. Members observed that if the cash rate were to be increased by 25 basis points at each meeting over the remainder of 2022, the cash rate would be 2.1 per cent by the end of the year. In a historical context, this would be quite a rapid tightening. While some central banks had been increasing policy rates in 50 basis point increments, these central banks meet less frequently than the Reserve Bank Board. Members also noted that, over the preceding couple of decades, increases in the cash rate had typically occurred in 25 basis point increments. The previous instance of the Board having increased the cash rate by 50 basis points was in February 2000.

Given the current inflation pressures in the economy and the still very low level of interest rates, on balance, members agreed to a 50 basis point adjustment in the cash rate target. Members also agreed that further steps would need to be taken to normalize monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will continue to be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market, including the risks to the outlook. The Board remains committed to doing what is necessary to ensure that inflation in Australia returns to the target over time.

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