MNI BRIEF: RBA Board Concerned Staff Forecasts Too Optimistic

The Reserve Bank of Australia will need to alter its forecasts for inflation and employment should its key assumptions on consumption growth, labour market capacity or price rise prove overly optimistic, according to the recently published minutes from the May meeting.

The board noted consumption growth is expected to remain weak for most of 2024, despite the stronger outlook for growth in income and wealth, “which have been the key determinants of consumption in the past.”

Less spare capacity existed in the labour market than previously assumed, and inflation will continue to moderate, despite recent information signalling more persistence than previously assessed, the board minutes stated. “If these judgements prove wrong, the forecasts for inflation and the labour market would need to be materially altered.”

The board debated either a rise or a pause at the meeting, which resulted in the cash rate holding steady at 4.35%. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility)

The board noted raising the cash rate could be appropriate if judgements underpinning staff forecasts risked being overly optimistic, leaving the balance of risks tilted to the upside.

“[Board members] agreed that the flow of information since the previous meeting had increased the risks of inflation staying above target for longer. However, members considered that the staff forecasts presented a credible path back to the inflation target, with the risks surrounding the forecasts judged to be balanced.”