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The minutes from the Reserve Bank of Australia’s (RBA) monetary policy meeting revealed that members of the board assessed that the risk of inflation not returning to target within a reasonable time frame had increased.
The board discussed this possibility based on several developments over the preceding period that supported the view that inflation would be slow to decline.
“Underlying inflation had fallen very little over the prior year in quarterly terms and, while the June quarter outcome had been in line with the staff’s forecast, inflation was still some way above target,” the minutes said.
“The revised forecast was for inflation to take a little longer than previously thought to return sustainably to target.
“Members noted that there had also been a pattern since early 2023 of both Bank and market-implied forecasts modestly underpredicting inflation a few quarters in advance.”
The increased risks were largely reflective of the slow pace of disinflation over the previous year, along with the staff’s judgement that the gap between aggregate demand and supply was “larger than previously assessed”.
Through affirming their strategy of bringing inflation back to target within a reasonable time frame, the minutes revealed that the board’s tolerance for this time frame being delayed “was limited”.
“Based on what they knew at the time of the meeting, members agreed that monetary policy would need to be tighter than this implied path in order to bring inflation sustainably back to target within a reasonable timeframe,” it said.
Cash rate considerations; how close were we to a hike?
The possibility of raising the cash rate was once again discussed by board members and would have been appropriate if members judged that there was a material increase in inflation not returning back to target within a reasonable time frame due to either economic developments or insufficiently tight financial conditions.
“Members discussed several developments that could suggest the risk of inflation not returning to the target range by late 2025 had risen materially. Underlying inflation was proving persistent and the central projection was now for inflation to return to target somewhat later than previously forecast,” the minutes revealed.
Observations such as this “could justify” an immediate increase in the cash rate, according to the board.
On the other hand, members discussed that holding the cash rate at 4.35 per cent and possibly for an extended period of time would be appropriate if inflation was “still broadly” on track to return to target within the RBA’s reasonable time frame.
This was primarily considered if the current cash rate level was judged to be appropriate to “balance the prevailing risks” to inflation.
“After weighing up these alternatives, members decided that the case to leave the cash rate target unchanged at this meeting was the stronger one,” the minutes said.
“They agreed that doing so would best balance the risks to both inflation and the labour market, particularly in light of the prevailing uncertainties, market volatility and market expectations.
“Members noted that it was appropriate to continue placing somewhat greater-than-usual weight on the flow of data, relative to the forecasts, when there were uncertainties about the persistence of supply shocks.”
Furthermore, members agreed that the flow of data since the prior meeting was insufficient to warrant a change in the stance of monetary policy and that holding the cash rate for a longer period than implied by market pricing may be enough to return inflation back to target.
However, members said that the board will “need to reassess this possibility at future meetings”.
[RELATED: RBA doubles down on cash rate decision with ominous message]
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