RBA more confident on inflation but too early to declare victory, December minutes show

Australia’s central bank is more confident that inflation is moving sustainably toward target but it’s still too soon to conclude the battle is won given a recent pick-up in consumption and a still-tight labour market, minutes of the December meeting showed.

The Reserve Bank’s board discussed scenarios in which future policy would be eased to boost economic growth or stay at current restrictive levels, according to minutes of the December 9-10 meeting released Tuesday.

The board concluded either outcome was conceivable and opted to stand pat at 4.35 per cent, saying recent data hadn’t been sufficient to shift the dial on the policy outlook.

Members noted that additional information on jobs, inflation and consumption, along with a revised set of staff forecasts, would be available by the time of the February 17-18 meeting, suggesting that review could be live. Traders are pricing a better than two-thirds chance the RBA makes its first interest-rate cut in February, and are fully pricing two reductions by July.

“Members judged that the risk that inflation returns to target more slowly than forecast had diminished since the previous meeting and that the downside risks to activity had strengthened,” the minutes showed.

“Members were alert to the risk that the unemployment rate could increase by more than expected if labour demand in the non-market sector were to slow abruptly.”

The minutes shine a spotlight on the board’s thinking in the month when governor Michele Bullock made a surprising dovish tilt. Australia has been a global outlier in the current cycle as most developed world economies have already eased substantially. The US Federal Reserve has signalled two more reductions for 2025, having already cut three times this year.

At the same time, the minutes also signalled that the RBA is still sensitive to the possibility that consumption and the jobs market remain strong enough to frustrate efforts to bring core inflation down to target.

Underlining the mixed economic outcomes lately, a private survey showed Australia’s consumer sentiment declined to remain in pessimistic territory while business confidence soured even as the jobless rate unexpectedly fell to 3.9 per cent.

The minutes pointed to a few factors explaining why policymakers think economic outcomes could go either way:

• A variety of employment indicators could be signalling that progress in the labour market moving closer to its full employment level had stalled.
• Early indications from the Black Friday sales point to strength in consumer demand
• Services price inflation globally had been more persistent than expected and this could also prove to be the case in Australia
• Various risks to the global economic outlook could, in some scenarios, limit the pace of further disinflation

There were also uncertainties over the level of policy restrictiveness with the RBA’s cash rate still below or comparable to the level in other developed world economies

“Despite the reductions abroad, the combination of market pricing and central banks’ estimates of neutral interest rates implied that monetary policy might be more contractionary in several economies than in Australia and remain so in 2025,” the minutes showed.

The RBA’s baseline scenario is for the unemployment rate to rise to 4.3 per cent in December and peak at 4.5 per cent next year. The central bank’s preferred inflation gauge, the trimmed mean, is seen finishing the year at 3.4 per cent before reaching the top of its 2-3 per cent target band by mid-2025.

Bloomberg