(Bloomberg) — Australia’s central bank resumed a discussion of interest-rate hikes at its May policy meeting before deciding that the case to stand pat was stronger as it aims to avoid “excessive fine tuning.”
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Minutes of the Reserve Bank’s May 6-7 gathering showed the board discussed two options when it left the key rate at 4.35%, noting the risks around its economic forecasts were still “balanced” despite stronger-than-expected data in the run-up to the meeting.
“Members considered that the staff forecasts presented a credible path back to the inflation target,” the minutes showed. “Members judged it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning.”
Read more: RBA Retains Neutral Policy Bias as Key Rate Held at 12-Year High
The central bank, which upgraded its near-term inflation forecasts, still expects consumer prices to return to its target in late-2025, from 3.6% in the first three months of this year. The updated forecasts used a technical assumption of no change in rates until mid-2025.
The minutes showed that the rate-setting board had “limited tolerance” for inflation returning to target later than 2026.
“Members agreed that it was important to convey that recent data and other information had signaled that the risks around inflation had risen somewhat,” the minutes showed. “It was difficult either to rule in or rule out future changes in the cash rate target.”
Governor Michele Bullock has previously suggested the RBA won’t need to wait for inflation to be inside the 2-3% band before cutting. Even so, she has repeatedly pushed back against speculation over near-term easing, reflecting the RBA’s forecasts that inflation will only return to target late next year.
Economists expect the RBA to begin cutting rates in November whereas financial markets are fully pricing in the first easing in the first half of next year.
The RBA’s gathering followed a highly-anticipated decision by the Federal Reserve, when Chair Jerome Powell kept hopes alive for a rate cut this year while acknowledging a burst of inflation has reduced confidence that price pressures are ebbing.
Data recently has indicated that Australia’s economy is broadly slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. The RBA said in the minutes that it expects weakness in household spending to continue this year.
At the same time, the labor market remains resilient, giving policymakers optimism that they can engineer a soft landing — bringing down inflation while holding onto the enormous job gains of recent years.
The minutes showed that raising the cash rate could be appropriate if:
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The board formed a view that the judgments underpinning the staff forecasts risked being overly optimistic about disinflationary forces
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If consumer spending picked up somewhat more rapidly, labor market outcomes remained benign, real household disposable income recovered and household balance sheets remained relatively strong. That together with further growth in public demand and business investment could delay inflation’s return to target
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If trend productivity growth turned out to be weaker than assumed
–With assistance from Garfield Reynolds.
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