While a rate hike wasn’t on the table at its last meeting, the minutes released on Tuesday revealed scenarios where the central bank might reconsider its approach.
Board members noted potential surges in consumption, driven by a recovery in disposable income that likely began in mid-year. This, the central bank said, could lead to a stronger labour market but also slow the return of inflation to target.
The minutes also raised alarms about aggregate supply constraints, suggesting that if the economy’s current supply has been overestimated or if future productivity growth is weaker than assumed, the cash rate may need to rise significantly above current market expectations to achieve sustainable inflation by 2026.
“Members observed that monetary policy could need to be tightened, even if the board’s judgements about consumption, the labour market and supply potential prove correct, should present financial conditions turn out to be insufficiently restrictive to return inflation to target,” the minutes stated.
“Members noted that the easing in financial conditions over prior months and the pick-up in credit growth made this scenario somewhat more plausible, as did the observation that banks were well placed to facilitate any strengthening in credit demand.”
On the flip side, board members also considered the possibility that a significant economic downturn could necessitate less-restrictive financial conditions.
“This could occur if households saved a significantly larger proportion of their incomes than currently assumed, perhaps because of earlier declines in real income and/or more persistent uncertainty,” the RBA said.
“It could also occur if the labour market weakened more sharply than forecast.”
Another scenario involves inflation proving less persistent than anticipated, which could occur if rent inflation drops faster than expected, if commodity prices fall and ease costs for businesses, or if the decline in discretionary spending flows through “materially more quickly” to services inflation.
“Each of these outcomes was conceivable given the considerable uncertainty about the economic outlook,” the RBA said.
“Therefore, future financial conditions might need to be either tighter or looser than at present to achieve the board’s objectives.”
Turning to economic developments abroad, the RBA added that it is not beholden to align its cash rate with international trends, as Australia faces higher inflation, a stronger labour market, and less restrictive monetary policy than many other advanced economies.
Ultimately, the RBA reaffirmed its commitment to returning inflation to target, noting that it will “do what is necessary” to achieve that goal.
