MNI: RBA Determined to Bring Inflation Down - May Minutes

The Reserve Bank of Australia is determined to bring inflation back to its 2-3% target and will do “what is required” to meet its goal, including further interest-rate increases, according to the May minutes released Tuesday.

“Members reaffirmed the Board’s determination to do what is required to bring inflation back to target, while emphasising that it is still seeking to traverse the narrow path,” the minutes showed. “Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve.”

The board noted, while the staff’s central forecast had inflation declining, it was not expected to reach the top of the target band until mid-2025. “Members noted that, although this was consistent with the Bank’s mandate and objectives, it left little room for upside surprises to inflation given that inflation would have been above the target for around four years by that time,” the minutes stated.

The RBA shocked markets at its May 2 board meeting, hiking rates 25bp to 3.85% (see: MNI RBA WATCH: Shifts Hawkish, Targets Services). Following the decision, RBA Governor Philip Lowe stressed the Reserve would seek to protect employment gains as it fights inflation (see: MNI: RBA Inflation Strategy to Protect Labour Gains). The Reserve believes unemployment will remain low for the next two years, while it debates internally how to curtail high rental costs.

The overnight index swap market shifted little following the release of the minutes, showing no change for the June meeting and a small chance rates could rise in July, which follows the release of the next quarterly CPI print. ACGBs were slightly stronger following the release of the minutes.

STICKY INFLATION

The board is concerned inflation, particularly in the services sector, could remain elevated for sometime, according to the minutes. Strong population growth and low rental vacancy rates could also see rents grow faster than the central forecast envisaged, the board noted. “Members observed that the forecast for inflation to return to the top of the target band by mid-2025 was predicated on productivity growth returning to around the modest pace recorded prior to the pandemic. If this did not occur, growth in unit labour costs would be uncomfortably fast.”

LABOUR MARKET

Members noted strong employment growth in March and that growth in Q1 had been concentrated in full-time employment. The board expects unemployment to reach 4.5% by late 2024. "Conditions in the labour market were not as tight as a few months earlier, with some easing in indicators of hiring intentions and a modest decline in vacancies," the board explained. "The increase in numbers of overseas arrivals had supported strong growth in employment in prior months and had also helped alleviate labour shortages in some areas. Even so, labour shortages remained a constraint for many firms, including in the construction sector."

Some RBA ex-staffers have questioned if the Reserve should lower its estimate of the unemployment rate compatible with stable inflation as the post-Covid labour market runs hot.

APRIL PAUSE

The RBA board noted its April pause was due in part to a change in asset prices. “Members also reviewed recent developments in asset markets – in particular, they noted the depreciation of the exchange rate and the increase in housing prices," the minutes noted. "While several factors had contributed to these developments, the decision to hold interest rates steady in April was likely to have contributed. Although the Board does not target asset prices, members agreed that movements in asset prices provide relevant information and need to be considered when assessing the outlook for activity and inflation.”