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The minutes from the Reserve Bank of Australia’s (RBA) February monetary policy meeting have shown that while the board did decide to lower the official cash rate to 4.1 per cent, this does not necessarily mean that further cuts will occur.
The decision to lower the cash rate did not come without the considerations of various risks, such as easing policy too soon could potentially add to inflationary pressures.
According to the minutes, board members said that the central forecast for inflation to settle “a little above the midpoint of the 2–3 per cent target range over the medium term was predicated on three to four reductions in the cash rate target over the year or so ahead”.
Alternatively, members said that leaving the cash rate at 4.35 per cent for an extended period showed underlying inflation “undershooting” the midpoint of the target range over the medium term.
The RBA said that both of these scenarios were subject to “material uncertainty”.
Members said that should evolving data signal that inflation was proving more stubborn than anticipated, maintaining a restrictive stance of policy by keeping the cash rate at 4.1 per cent for an extended period of time would be reasonable.
“In light of these considerations about the risks surrounding the board’s decision, members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” the minutes said.
“While economic outcomes had given members more confidence that they could return inflation to target at the same time as preserving most of the gains in the labour market with a lower cash rate, they agreed that this was not yet assured.”
This led to board members expressing caution in regard to any further policy easing.
While there was deliberation to keep the cash rate at 4.35 per cent, the primary reason for the RBA’s decision was due to there being signals from recent trends in inflation and wages.
ANZ head of Australian economics Adam Boyton said that while the emphasis on inflation is “not a surprise”, Australian wages data “can come with some shortcomings”.
“Still, it nonetheless highlights the importance of the Wage Price Index over coming quarters,” Boyton said.
“The minutes also make clear – as was the case in the forecasts published in the Statement on Monetary Policy that –if the cash rate is reduced in line with market expectations, then underlying inflation ‘was then forecast to remain above the midpoint of the target range’.”
Boyton said that there was nothing in the minutes to sway the ANZ economics team from anticipating another rate cut – likely at the August meeting – in this current cycle.
“The risks to that view are starting to look a little more offshore than domestic, however, and should the global environment deteriorate then additional RBA easing may become necessary,” he said.
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