AUSTRALIA’S central bank decided to stand pat on interest rates at its May meeting in part to avoid “excessively fine-tuning” policy, but judged a hike might be needed if forecasts on inflation proved too optimistic.
Minutes of its May 6 to 7 Board meeting out on Tuesday (May 21) showed the Reserve Bank of Australia (RBA) considered raising its 4.35 per cent cash rate given the run of domestic economic data had been stronger than expected and risks to inflation had risen somewhat.
However, the board judged the case for holding steady was stronger given the central bank’s economists were predicting weak consumption growth and continued moderation in inflation to target in late 2025.
The board considered those forecasts were “sound”, with balanced risks.
“Importantly, inflation expectations remained well anchored,” the minutes showed.
“Given this and the higher than usual level of uncertainty about the economic outlook, members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning.”
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Financial markets, which had been wagering on a real chance of another hike in rates after a strong inflation reading in the first quarter, are now back to betting the next policy move would be down after wages and jobs data disappointed last week.
However, the first easing was seen as unlikely to come until December, with an implied probability of about 50 per cent.
The board members expressed limited tolerance for inflation returning to target later than 2026, and noted rates can go up again if the board formed a view that the judgments underpinning the forecasts risked being “overly optimistic”.
They noted it was possible consumer spending could pick up somewhat more rapidly given the strength in the labour market, and the growth in public demand and business investments could accelerate, delaying the return of inflation to target. REUTERS