Is Monetary Policy Restrictive Enough?

The June meeting minutes suggest that the Board will hike rates if it determines that policy is “not sufficiently restrictive to return inflation to target within a reasonable timeframe” because disinflation and closure of the output gap are slower than expected. At the August 6 meeting that assessment will be dependent on Q2 CPI on July 31 and the updated staff forecasts which will include not just the new CPI but also fiscal stimulus information. It will also “carefully review the extent of spare capacity” in this exercise.

• If the RBA revises up its CPI profile which pushes out the timing of the return of inflation to target, accompanied by little change or an upward revision to growth, the August meeting is likely to be “live” for further monetary tightening.
• The minutes included a list of upside risks to the RBA’s forecasts including consumption, stronger global growth, easier financial conditions for businesses, pick up in market-implied inflation expectations, and recent domestic and overseas inflation data. In addition, if the supply-side is deemed to be “more constrained” than assumed in May, that would add to the case for a hike.
• The Board decided to leave rates unchanged in June though since the data in aggregate didn’t suggest a shift in expectations that target would be achieved by 2026, “despite some elevated upside risk”. Also there hasn’t been “enough evidence” that the demand outlook has strengthened, while there remains significant uncertainty especially regarding consumption.
• The RBA is even more data dependent as the “’narrow path’ was becoming narrower” and it remains “vigilant” to upside inflation risks.