Inflation Risks “Risen Somewhat”, RBA Seems Firmly On Hold

The minutes from the May 7 RBA meeting noted that the data had come in “stronger than expected” but it decided to look through short-term developments to “avoid excessive fine tuning”. As a result, the Board decided to leave rates unchanged but as Governor Bullock said in the press conference a hike was discussed. While the “risks around inflation had risen somewhat”, the general tone of the minutes was neutral demonstrating a strong desire to hold rates thus the bar remains high for a move in either direction.

• The downside risks to growth offset the upside ones to inflation. There is significant uncertainty and the path back to target is unlikely to be “smooth” and so the RBA is on hold for now as it is “difficult to rule in or rule out future changes in the cash rate”.
• A hike was discussed due to the stronger-than-expected inflation and labour data. There was also concern that the assumptions around the projection that inflation returns to target by end-2025 were “overly optimistic”. The risk that consumption picked up more than expected driven by the labour market, real incomes and wealth was also discussed. The risk to achieving target from slow productivity with high wages growth was also mentioned.
• The policy hold was determined from the “balanced set of risks around the central forecasts” and inflation’s return to target as previously expected. It was also deemed to be appropriate if demand proved softer than expected or if the labour market is already “close to full employment”.
• See minutes here.