RBA Sees Recent Data as Insufficient to Prompt Cash Rate Hike

Swati Pandey

Mon, Jul 1, 2024, 6:30 PM3 min read

(Bloomberg) -- Australia’s central bank saw the case to hold interest rates at a 12-year high in June as the “stronger one” as recent data hadn’t been sufficient to change its long-held assessment that inflation would return to target by 2026.

Most Read from Bloomberg

Minutes of the Reserve Bank’s June 17-18 gathering Tuesday showed the board discussed two options when it left the key rate at 4.35%, noting the need to remain “vigilant” to upside risks to inflation. The RBA reiterated it was “difficult either to rule in or rule out” future policy moves.

“It was still possible to achieve the board’s strategy of returning inflation to target in a reasonable timeframe without moving away significantly from full employment, even though this narrow path was becoming narrower,” the minutes showed. “With economic uncertainty heightened at present, members emphasized the importance of paying close attention to developments in the economic data.”

The minutes shine a spotlight into the board’s thinking as fears the RBA could resume tightening policy at its next meeting gained momentum after a partial gauge of consumer prices showed inflation accelerated to 4% in May, well above the central bank’s 2-3% target. A detailed quarterly report will be released on July 31.

Prior to the release of the minutes, financial markets were pricing in a 60% chance of a rate hike to 4.6% this year.

Globally, prospects are dwindling for a swift removal of the unprecedented tightening delivered during the post-pandemic cost-of-living crisis. Central bankers worried about lingering consumer-price pressures are seen adopting a far gentler downward trajectory for rates than they did on the way up.

In discussing the case to raise rates further, RBA board members noted that domestic demand was holding up better-than-expected. The board noted an improvement in global outlook is also likely to support Australia’s export-heavy economy, while recent data did imply “some upside risk” to the RBA’s latest forecasts.

“The case to raise the cash rate could be further strengthened if members judged that aggregate supply was likely to be more constrained than had been assumed,” the minutes showed. “Productivity growth remains very weak.”

Members also noted that market-implied risk premium suggested a higher risk of an increase in inflation expectations more widely.

The RBA’s goal to preserve recent labor market gains together with mixed economic data were key reasons why the board left rates unchanged.

Data recently has indicated that Australia’s economy is slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. The RBA expects weakness in household spending to continue this year and noted there was “clear evidence that many households were experiencing financial stress.”

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.

--With assistance from Garfield Reynolds.