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The minutes of the May monetary policy meeting have shown that while the Reserve Bank of Australia (RBA) considered lifting the cash rate, members still found that there was a credible path back to the inflation target, while judging the risks surrounding the forecasts to be balanced.
The minutes read: “… The case to hold the cash rate steady at this meeting was premised on the view that, while there had been notable updates on the state of the economy since the previous meeting, the updates had not been sufficient to warrant a change in the stance of monetary policy.
“Inflation was still declining towards the target and the recent information did not materially alter its trajectory.
“Furthermore, the forecasts showed a credible path by which the board could meet its objectives in a time frame that was consistent with the board’s strategy.”
In leaving the cash rate unchanged at 4.35 per cent, board members agreed that the flow of information since the March meeting had “increased the risks of inflation staying above target for longer.”
“However, members considered that the staff forecasts presented a credible path back to the inflation target, with the risks surrounding the forecasts judged to be balanced. Importantly, inflation expectations remained well anchored,” the minutes said.
Taking all this into account, along with the high level of uncertainty around economic outlook, the RBA board determined that it was reasonable to “look through short-term variation in inflation to avoid excessive fine-tuning”.
In discussing another rate hike – which would’ve been the 14th hike in two years – the RBA board deliberated that a hike “could be appropriate” if it formed a view that the “judgements underpinning the staff forecasts risked being overly optimistic about the forces that would drive down inflation, leaving the balance of risks tilted to the upside”.
Reacting following the publication of the minutes, ANZ’s head of Australian economics, Adam Boyton, said that the May minutes took on a “more hawkish tinge” than the post-meeting statement with a “reasonable discussion around hiking at the meeting”.
“We are left with the impression that any resumption of tightening from the RBA would require the Board to be of the view that inflation was unlikely to return to the band over the next few years and that the hurdle to act is now higher than November’s risk management tweak,” Boyton said.
“We continue to think that the economy is softening enough to deliver in target inflation and hence retain our view that the next move in the cash rate is down (most likely in November, although risks are skewed toward a later start to the easing cycle).
“We only expect a modest easing cycle in total, with just three rate cuts.”
Commonwealth Bank of Australia (CBA) senior economist Belinda Allen also said the hurdle to another rate hike “seems high” and instead the risks “sit to a later start to the easing cycle” than the major bank’s base case.
“Overall, we remain comfortable with our base case. Our central scenario sees the RBA commence an easing cycle in November 2024,” Allen said.
“However, the arrival of circuit breakers on 1 July will need to be watched for the consumer response.”
AMP chief economist Shane Oliver said the March quarter Australian and US “inflation scare is likely receding”, while the most likely scenario is that the RBA “holds rates ahead of rate cuts starting later this year” despite near-term upside risks.
“The risk for interest rates in the next few meetings is still skewed to the upside, particularly if inflation comes on the high side again,” Oliver said.
“However, with the economy weak, the labour market cooling and inflation likely to keep slowing, our base case is for the RBA to remain on hold ahead of rate cuts starting in November or December.
“We now only expect one rate cut this year (taking the cash rate to 4.1 per cent) and are allowing for two cuts next year, key to watch will be monthly inflation data, the upcoming FWC decision regarding award wages, unemployment and household spending.”
Ultimately, the RBA board said that it was “difficult to either rule in or rule out future changes in the cash rate” given that the process towards returning inflation back to target is “unlikely to be smooth” coupled with considerable uncertainty in the outlook for both the labour market and inflation.
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