RBA Sees Cash Rate as Appropriate, Discusses Policy Scenarios

Australia’s central bank sees its current policy settings as appropriate to try to pull down core inflation that is still “too high,” while discussing at its meeting two weeks ago scenarios that might require an interest-rate cut, hike or for them to stay higher for longer.

Author of the article:

Bloomberg News

Michael Heath

Published Nov 18, 2024  •  2 minute read

rth{]piqucmo6o4]2uv9(c}k_media_dl_1.png RBA, Australian Bureau of Statis

(Bloomberg) — Australia’s central bank sees its current policy settings as appropriate to try to pull down core inflation that is still “too high,” while discussing at its meeting two weeks ago scenarios that might require an interest-rate cut, hike or for them to stay higher for longer.

“Monetary policy in Australia was assessed to be restrictive,” the Reserve Bank said in minutes of its Nov. 5 decision released in Sydney on Tuesday. “However, the degree to which this was the case remained uncertain and broader financial conditions had eased somewhat over preceding months.”

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The RBA board noted staff forecasts released together with the decision were based on the technical assumption that the cash rate remained at its current level for a number of months before being lowered several times in 2025 and 2026. It judged the risks around the forecasts to be “balanced.”

The central bank’s hesitancy in its outlook reflects the policy meeting being held on the day of the US presidential election that saw Donald Trump — with his proposal to raise tariffs on China to 60% — win comfortably. Given China is Australia’s biggest trading partner and it is the world’s second-largest economy, the repercussions from such a move are likely to be substantial.

The RBA highlighted three major offshore risks:

• The potential for “major changes” in US economic policy
• The prospect of the size or composition of China’s stimulus package differing from expectations; and
• The general risk of unsustainable growth in government debt

“Members agreed that it was not yet possible to factor in events such as these, given pertinent details were unknown and still largely unpredictable,” the minutes showed, reiterating comments from Governor Michele Bullock during testimony.

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The RBA has kept its cash rate at 4.35% for the past year as it tries to rein in consumer prices while shielding the labor market and bringing the economy in for a soft landing. While inflation has been cooling – headline CPI fell sharply in the third quarter due to government energy subsidies – it still remains elevated and core prices aren’t seen sustainably returning to the 2-3% target until 2026.

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The RBA said it remains “vigilant” to upside risks to inflation and has “minimal tolerance” to accommodate a more prolonged period of elevated prices given how long they have stayed above target.

Among scenarios for a potential rate cut, the bank highlighted:

• If consumption proved to be persistently and materially weaker than the staff forecast and this lowered inflation significantly
• If labor market conditions eased much more sharply than expected, cutting inflation

Current policy may need to remain in place longer than assumed if

• The recovery in consumption proved sharper than forecasts envisaged

They also pointed to potential for a tighter policy stance being needed if the supply capacity in the economy was materially more limited than assumed

“Members agreed that it was important to keep monetary policy sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target,” the RBA said. “They noted too that it is important to remain forward looking, avoiding an excessive reliance on backward-looking information that might lead the board to react too late to a change in economic conditions.”

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