Hike & Pause Discussed, RBA Seems On Hold For Now

The RBA Board discussed leaving rates at 4.35% and a 25bp increase but decided on the former as it best balanced its objectives of price stability and full employment. But the tightening bias was retained given that inflation was still high, costly and it would take time for it to feel confident inflation was returning to target, and there were still considerable uncertainties. The Board is prepared to respond to the data, risks and changes in the outlook but the minutes suggest that for now it is on hold.

• The tone of the discussion around inflation remained hawkish with concerns that most of the work in bringing it down had been done by goods prices and any further slowing was “likely to be modest”, whereas services “remained high and had declined only a little”, largely reflecting excess demand.
• The risk that inflation wouldn’t return to target in a “reasonable timeframe” had “eased” though and the updated forecasts had that occurring assuming no change in rates.
• Data had come in weaker-than-expected, including consumption. Risks to the outlook are balanced though but there is a risk that household spending “weakens more sharply”.
• The case for further tightening was centred on the return to the mid-point of the band being still two years away and a hike would reduce the risk of inflation not “returning to target in an acceptable timeframe”. It commented that another hike wouldn’t prevent it from easing if the economy weakened “more sharply”.
• The key risks that the Board is concerned about are inflation not returning to target as expected, productivity growth not recovering and consumption being materially weaker than forecast. Scenarios were considered where inflation expectations rose gradually and consumption was weaker.