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In leaving the cash rate unchanged at 4.35 per cent during its November monetary policy meeting, members of the Reserve Bank of Australia (RBA) acknowledged the importance of being ready to adjust its stance on the cash rate.
Prior to the cash rate decision, the RBA board said that the bulk of the information received since the September meeting “had been consistent with expectations of the board and staff, which had been broadly true at the time of the September meeting too”.
“As a result, the staff’s updated forecasts were very similar to those published in August. The risks surrounding the forecasts were also still judged to be balanced,” it said.
While inflation has drastically declined over the prior year, falling from a peak of 7.8 per cent to 2.8 per cent as of the September quarter of 2024, the RBA said that underlying inflation remained too high, with staff forecasts predicting a sustainable return to target in 2026.
Additionally, employment growth had remained strong with some forward indicators in the labour market having “stabilised or strengthened”. On the other hand, growth in GDP had remained subdued, reflecting weakness in private consumption.
“The staff forecast was for a strengthening in consumption growth to underpin a recovery in GDP growth to around estimates of the potential growth rate over the coming year, and for the unemployment rate to stabilise around the staff’s estimates of full employment from late 2025,” the minutes said.
“Monetary policy in Australia was assessed to be restrictive. However, the degree to which this was the case remained uncertain and broader financial conditions had eased somewhat over preceding months.
“Members noted that the staff forecasts were conditioned on a technical assumption – derived from market pricing – that the cash rate target would remain at its current level for a number of months before being lowered several times in 2025 and 2026.”
However, while the cash rate remained unchanged, members considered conditions that “might warrant either a future change in the cash rate target or a decision to hold it at its present level for a prolonged period”.
According to the RBA, it was agreed that it was important to “keep monetary policy sufficiently restrictive” until the board is confident that inflation is heading sustainably towards the 2–3 per cent target.
“They noted too that it is important to remain forward looking, avoiding an excessive reliance on backward-looking information that might lead the board to react too late to a change in economic conditions,” it said.
Board members discussed potential scenarios in which the “key judgements underlying the forecasts proved incorrect” and necessitate an adjustment in monetary policy.
These considerations ranged from consumption being weaker or stronger than expected, requiring rate cuts or prolonged rate holds, as well as the possibility of a more relaxed labour market and weaker productivity growth.
“Members also discussed a range of particular risks from abroad that could result in the forecasts being materially wrong and therefore have important implications for monetary policy,” the minutes said.
“These included the potential for major changes in US economic policy following the presidential election, the prospect of the size or composition of the stimulus package foreshadowed by Chinese authorities differing from expectations, and the more general risk of unsustainable growth in global government debt.
“Members agreed that it was not yet possible to factor in events such as these, given pertinent details were unknown and still largely unpredictable, but that this would need to be done if these risks eventuated.”
The final note was that monetary policy could require an adjustment if the RBA formed the view that “the stance of policy was not as restrictive as had been judged”.
Members emphasised the importance of paying close attention to potential signs of this, which include developments in credit growth, the willingness from banks to lend, and growth in asset prices.
Mixed messages
Reacting to the minutes, Commonwealth Bank of Australia’s (CBA) head of Australian economics, Gareth Aird, pointed out “some mixed messaging” in the board’s statements.
“The November RBA board minutes make explicit reference to the importance of being forward looking in the policy setting process. But a number of statements in the minutes today [19 November] imply that the RBA is still highly reliant on incoming data and may need to see more than one ‘good’ quarterly inflation report to consider easing policy (note that inflation is a lagging indicator),” Aird said.
“Our take is that the board would only consider cutting the cash rate in February 2025 (i.e. after the Q4 24 CPI is released), if the economic outlook has softened relative to the RBA’s latest forecasts.”
ANZ head of Australian economics, Adam Boyton, said that the minutes contained “some guarded references which could imply the board is opening the door to a policy easing”.
“That said, any easing in early 2025 would likely require a moderation in trimmed mean inflation (which we expect),” Boyton said.
“We still see the Reserve Bank’s first rate cut in February 2025. The balance of activity data had suggested the risks of a later start to the easing cycle were rising. The tone in the minutes today tempers that risk a little.”
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