The minutes of the August monetary policy meeting released by the Reserve Bank of Australia (RBA) have detailed fragile recovery in domestic growth, shifting global outlooks and the need to secure inflation’s return to target as the reasons behind the August cash rate cut.
According to the minutes, members placed strong weight on evidence that inflation is moving sustainably towards its long-coveted midpoint range of 2–3 per cent over the forecast period, while labour market conditions were “expected to be close to balance over that time”.
“Members noted that the downward revision to the assumption for medium-term productivity growth was judged not to have implications for the degree of inflationary pressure, and hence for the stance of monetary policy,” the minutes stated.
The RBA judged that output growth remains subdued, albeit there being tentative signs of improvement.
Private demand is beginning to recover, but the central bank noted there are risks on both sides of the forecast and while the global economic environment is still uncertain, the threat of retaliation against US tariffs has eased in recent months, reducing the risk of a sharp downturn in world trade.
Board members also highlighted that financial conditions have eased since the start of the year, with reductions in the cash rate and a fall in market risk premia supporting activity.
“Members unanimously agreed that these considerations formed a strong case for lowering the cash rate target by 25 basis points at this meeting,” the minutes stated.
Nonetheless, they concluded that policy remained “somewhat restrictive” and that easing was required to sustain progress on inflation and employment objectives.
The RBA acknowledged that monetary policy at this point carries significant uncertainties.
It emphasised that preserving full employment while anchoring inflation within the target band would likely require further reductions in the cash rate over the year ahead, though the pace of cuts will be guided by incoming data.
In debating reasons for adopting a gradual approach in rate cuts, members noted that labour market conditions were still “a little tight”, along with the forecast for inflation expected to sit “marginally” above the midpoint target in the medium-term.
Additionally, the slow recovery in private demand suggested to members that there was no urgency for rapid-fire rate cuts, particularly due to uncertainty about the degree of spare capacity in the economy and the neutral interest rate.
However, faster action on the cash rate has not been ruled out. Members recognised there were a range of circumstances that could justify quicker rate reductions.
If the labour market is already at balance, the minutes warned that leaving policy too restrictive could cause inflation to undershoot the target range as slack re-emerges in employment.
A faster pace of easing might also be required if the balance of risks turned more clearly to the downside, perhaps through weaker global growth or an uneven shift from public sector to private sector job creation.
The board stressed that it is too early to determine which of these scenarios will prevail. Instead, it emphasised the importance of flexibility and responsiveness, underscoring a commitment to making decisions “on a meeting-by-meeting basis” in response to new data.
“Members agreed that monetary policy would be well positioned following this decision to respond to future data and shocks that may emerge,” the minutes noted. “The board will remain focused on its mandate to deliver both price stability and full employment and will do what it considers necessary to achieve that outcome.”
CBA senior economist Belinda Allen noted the “new information” regarding the potential for quicker rate cuts if the “labour market turned out to already be in balance”.
“Economists, including us here at CBA, have suggested the NAIRU (non-accelerating inflation rate of unemployment) was around current levels,” Allen said. “Part of the concern the RBA minutes raised is if the handover from the non-market sector to market sector employment was not proceeding smoothly.
“If this is the case, wages growth would slow a little faster than the RBA expected and could suggest downside risks to inflation would emerge.”
Allen stated CBA still expects the RBA to cut the cash rate by 25 basis points in November, bringing the cash rate down to 3.35 per cent.
