Minutes from the latest Reserve Bank of Australia (RBA) monetary policy meeting have been released today, highlighting the rationale behind the August 1 decision to leave interest rates unchanged at 4.1 per cent.
As the RBA deliberated on its August decision, two main options were under consideration: lifting the cash rate by another 25 basis points (bps) or keeping it steady.
The argument for an increase centred on the risk of inflation proving more persistent than anticipated. However, with the impact of earlier rate hikes, and signs of consumption slowdown emerging, the board ultimately opted to leave the rate unchanged this month.
The decision followed a series of incremental rate hikes over the past year, and the RBA’s decision comes amid a mixed economic landscape.
Global economies
Growth in advanced economies has slowed, largely attributed to tighter monetary policy and rising living costs, and while the manufacturing sector has experienced a slowdown, the services sector has demonstrated resilience.
The situation in China presents a unique challenge, with a weaker-than-expected economic recovery following the lifting of COVID-19 restrictions.
Weak external demand and property market pressures have hindered growth, while household consumption shows signs of recovery. However, inflation in China remains notably low.
Partly due to China, the RBA’s decision to hit pause came amid forecasts that Australia’s major trading partners were expected to experience slower growth than previously anticipated.
Domestic conditions
Turning to domestic economic conditions, consumer price inflation has eased from its peak but remains high.
Goods price inflation has seen a decline, reflecting global cost pressures and slowed domestic demand growth. Nevertheless, services price inflation, especially for market services, and rent inflation persist at elevated levels.
The RBA’s inflation forecasts have seen minimal changes, and the trajectory indicates a gradual return to the 2-3 per cent target range by late 2025. Trimmed mean inflation for the June quarter was six per cent, well above the target level.
While goods price inflation is expected to drive the decline in inflation over the coming year, persistent cost pressures from demand, labour market tightness, and energy costs are expected to sustain inflationary pressures, particularly in services.
August pause
In turning to the policy decision, members noted data released over the prior month showed the economy was still on the narrow path in which inflation returns to target while employment and the economy continue to grow.
The board noted that the recent information on inflation was encouraging, and the economy was expected to grow only slowly over the period ahead and a pause would help with the further moderation of inflation.
At the same time, members agreed that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a “reasonable” timeframe.
The attention now shifts toward the RBA’s next decision.