The Reserve Bank’s latest minutes continued to reflect the sense of concern portrayed in May, with the bank admitting that recent inflation data has heightened the risk that sustainable progress towards the inflation target may be slower than forecast.
The bank acknowledged that members considered raising the cash rate beyond the 4.35 per cent, having observed factors suggesting stronger-than-expected demand, signs of global economic recovery supporting Australian demand, and easing financial conditions for larger businesses.
“Collectively, these developments could limit the extent to which current policy settings were sufficient to bring aggregate demand back into line with aggregate supply,” the RBA said.
“Moreover, recent inflation data – both domestically and from abroad – suggested some upside risk to the May forecast profile, since inflation was taking longer to abate than had previously been assumed.”
Additionally, concerns regarding the level of constraint on aggregate supply, weak productivity growth, and the increase in the market-implied risk premium further underscored the case for a rate increase.
Conversely, the RBA said the case to hold the cash rate was based on the view that the economy was still broadly tracking on a path consistent with returning inflation to target in 2026, while preserving as many of the gains in employment as possible.
Members acknowledged mixed economic signals, including lower inflation from peak levels in late 2022, evidence of slowing wage growth since late 2023, weak output growth, and indications of a weaker-than-implied labour market, as key reasons to keep the rate on hold.
“In weighing up these options, members judged that the case to leave the cash rate unchanged at this meeting was the stronger one,” the RBA said.
“Members agreed that the collective data received since the May meeting had not been sufficient to change their assessment that inflation would return to target by 2026, despite some elevated upside risk around the forecast.”
Moreover, the board reiterated its ongoing belief that it is still possible to achieve its strategy of returning inflation to target in a reasonable timeframe without deviating significantly from full employment.
However, admitting that the “narrow path was becoming narrower”, the RBA said it would continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.
“Members agreed that it was important to convey that the information received since the previous meeting had reinforced the need to be vigilant to upside risks to inflation, and that the extent of uncertainty at present meant it was difficult either to rule in or rule out future changes in the cash rate target,” the RBA said.
As was the case in its post-meeting statement, the RBA hinted that recent budgets may have an impact on demand.
The bank said: “Energy rebates and rent assistance would lower headline inflation in 2024, though this direct effect would be reversed later in 2025”.
“Members noted that the staff would incorporate an assessment of the impact of the budgets on the outlook for output and inflation in the August forecasting round.”
Touching on the furore around the budgets’ potential inflationary impact during her media conference last month, governor Michele Bullock stated that the board considered the collective impact of the federal and state budgets on the economy.
Warning that the substantial budgets risk stoking demand, Bullock said achieving the inflation target would be a “slow grind”.
Treasurer Jim Chalmers hastily responded with: “I don’t tell [Bullock] how to do her job, and the governor doesn’t tell me how to do my job”.
Ultimately, while the RBA vowed to remain data dependent, it cautioned that if inflation expectations were to rise “materially from current levels”, it could require “significantly higher interest rates” to bring inflation back to target.
