Key points:
  • The RBA June meeting minutes revealed the Board considered raising the cash rate due to the slower-than-expected decline in inflation.
  • Upward revisions to household consumption and potential supply constraints supported the case for a hike.
  • Downside risks to the labour market outlook reinforced the case to hold.
  • The Board ultimately opted to keep the benchmark rate unchanged at 4.35%, believing inflation could return to target while preserving gains in the labour market.

While RBA Gov Michele Bullock reiterates the Board’s “not ruling anything in or out” mantra in dealing with monetary policy, the June meeting minutes revealed the case for a hike was clearly ruled in as a result of the slower-than-expected decline in inflation.

Although the meeting predates the upside surprise delivered by the May monthly CPI, the minutes showed that the central bank was already vigilant to the upside risks to inflation on the back of April outcomes.

“The monthly CPI indicator for April had exceeded expectations because of stronger-than-expected durable goods price inflation,” the minutes read. 

With limited information on services price inflation, the Board acknowledged the increased risk “that sustainable progress towards the inflation target may be slower than forecast".

This was different from a few months ago when less or even no space was dedicated to the possibility of a rate hike.

Hopes for a rate cut have gradually dimmed following faster than expected rise in consumer prices in the second quarter. 

The monthly inflation indicator in April came in hot at 3.6% and further sizzled to 4.0% in May. 

The trimmed mean inflation, which is the Reserve Bank's preferred gauge in measuring consumer price movements, accelerated to 4.1% in April and quickened to 4.4% in the following month. 

The monthly figure is volatile, however, and the RBA will look for the more reliable quarterly inflation figures, which are due in late July, a few days before the next Board meeting.

Nonetheless the monthly indicator paints a bleak picture that the underlying inflation in Q2 is likely running ahead of RBA’s expectations for the trimmed mean inflation to ease at 3.8%. 

“Following the second month (May) CPI indicator, a 1.0% q/q looks like a more reasonable central case,” NBA head of market economics Tapas Strickland said. 

“Any further upside surprise would be very difficult for the RBA to tolerate within its current stance.”

The minutes confirmed this view, revealing that, “Members acknowledged that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target.”

RBA concedes: Policy already restrictive

While weighing its options, the RBA recognised that further policy tightening would squeeze the already hurting Australian households and, to a lesser extent, businesses. 

The Board conceded that overall financial conditions were restrictive, which RBA Assistant Governor (financial markets) Christopher Kent affirmed in a presentation days after the meeting. 

Since May 2022, the central bank has raised the cash rate target by 425 basis points to 4.35%.

According to Asst Gov Kent, the cash rate being currently above the estimated nominal neutral rate indicates that the monetary policy is restrictive and doing its job to bring aggregate demand into better balance with aggregate supply.

“Raising the cash rate at this meeting could be appropriate if members formed the view that policy settings were not sufficiently restrictive to return inflation to target within a reasonable timeframe,” the minutes read. 

The upward revisions to household consumption in the Q1 2024 National Accounts and a gradual strengthening in the global economic cycle were introduced as factors to consider for a rate hike.

However, members noted that demand was likely to hold up better than expected, believing that “there were several reasons not to place too much weight on the revisions to consumption, including that much of the upside surprise had been related to imports.”

The argument of aggregate supply being more constrained than assumed was also considered in the case of raising the cash rate. 

On the flip side, the case to hold was based on the view that “the economy was still broadly tracking on a path consistent with returning inflation to target in 2026.”

The argument for hold was further strengthened by the Board's commitment to maintaining employment gains, which the RBA assessed as “still tight but easing”.

Hence, the case to hold ultimately emerged as the stronger one. 

The minutes confirmed that the rate-setting committee was still convinced that inflation could return to target in a reasonable timeframe while holding onto gains in the labour market even though this ‘narrow path’ was becoming narrower.

In the end, the Board is determined to be reasonably data-dependent. 

“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.”

All eyes on upcoming data flows

New RBA forecasts and a more robust set of economic data that will provide the Board with more information will be one to watch as they are released ahead of the next monetary policy meeting on 5-6 August. 

First up will be Australia’s jobs data for June out on 18 July. Figures on retail trade and building approvals will soon follow.

However, all eyes are expected to be peeled for Australia’s quarterly inflation figures due on 31 July. 

June quarter headline inflation estimates vary between 3.8% and 3.9%, while the annual trimmed mean is tipped to land at 4%, exceeding RBA’s forecast of 3.8% for both. 

In addition to the Q2 CPI, the staff is expected to incorporate an assessment of the impact of the federal and state budgets on the inflation outlook.

The Board believes recent budget measures such as energy rebates and rent assistance would lower headline inflation in 2024, with effects reversing in 2025.

Photo courtesy of the Reserve Bank of Australia