Members of the Reserve Bank of Australia (RBA) appear to have taken comfort in the latest inflation data as the central bank maintains its focus on traversing the so-called “narrow path”.
In its August meeting minutes released on Tuesday, the RBA indicated that “the information received on inflation over the prior month had been reassuring” to board members.
The consumer price index (CPI) lifted 0.8 per cent last quarter, below the market’s expectation for a 1.0 per cent quarterly rise and lower than the forecasts of most economists.
“Inflation had fallen further and been a little lower than expected in the June quarter,” the RBA acknowledged.
“However, members observed that there had not yet been any material slowing in services price inflation, and the experience globally had been that services price inflation was more persistent than expected.”
Analysing the meeting minutes, Commonwealth Bank senior economist Belinda Allen said the RBA now sounded more comfortable that inflation is heading in the right direction while remaining on alert for sticky services prices.
She noted that the minutes followed a large amount of communication recently from the RBA, including its quarterly statement on monetary policy and Philip Lowe’s final appearance as governor before the House of Representatives standing committee on economics.
“In all three communications, the same tone has been struck of a central bank that appears more comfortable they are on the path to achieving the desired ‘even keel’, i.e. inflation returning to target and some of the gains in the labour market secured.”
The latest meeting minutes highlighted the “considerable resilience” of Australia’s labour market with a “very low” unemployment rate that has remained at around 3.5 per cent for the past year.
“However, there were some signs that the labour market was at a turning point, including a small rise in the underemployment rate,” the RBA noted.
“More generally, members noted signs that the substantial rise in interest rates over the prior year was constraining demand, including in the retail sector, where the value of sales had not grown for some time.”
CBA has maintained its forecast that the RBA will remain on hold for an extended period at 4.10 per cent and said the minutes affirmed its view that the hurdle to hike the cash rate is high.
“The minutes note the arguments to lift the cash rate again will really come down to three things: sticky services prices, a lack of recovery in productivity growth, and stronger wages growth,” Ms Allen said, before adding that slower-than-expected wages growth in the June quarter “make this latter argument more challenging to eventuate”.
RBA discusses August decision
According to the RBA, the case to raise the cash rate in August centred around the risk that inflation may prove to be more persistent than is forecast at present.
“Members observed that, were this to occur, it would require the board to raise the cash rate by more than otherwise to get inflation back to target, making it very difficult to preserve the gains made in employment over prior year. Raising the cash rate at this meeting would help to mitigate the risk of that undesirable scenario eventuating,” the meeting minutes read.
“In addition, members noted that the staff’s forecasts were already conditioned on a further increase in the cash rate and that the cash rate was notably lower than policy rates in other countries, despite inflation in Australia being at least as high.
“Finally, members observed that the resumption of growth in housing prices could be a signal that financial conditions were not as tight as they had assessed.”
But members agreed that the argument to leave the cash rate unchanged was stronger in light of the significant amount of tightening already delivered, signs that this tightening is working as intended and the opportunity for the board to wait and see how the economy evolves.
“Members noted that the full effects of the earlier tightening were yet to be recorded in the data. Even so, consumption had already slowed significantly, there were early signs that the labour market might be at a turning point and inflation was heading in the right direction,” the RBA said.
“Considering this and the forecasts, members observed that there was a credible path back to the inflation target with the cash rate staying at its present level.”
As similarly noted in Dr Lowe’s post-meeting statement, the RBA said some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, depending on data and the evolving assessment of risks.
The board vowed to continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
Key data releases ahead of the RBA’s September meeting will include labour force data on Thursday, retail trade data on 28 August, and the monthly CPI indicator on 30 August.
