The RBA' balanced approach to monetary policy amidst persistent inflation and economic pressures

Last week the Reserve Bank of Australia (RBA) released the minutes from their most recent monetary policy meeting, held earlier this month. The decision to keep the cash rate was made because there had not been sufficient data to warrant a change at this stage. Given that inflation is continuing to trend down, towards the top of the target range, and the path has not altered course, there was no argument against the decision made this month. However, the messaging does not rule out an additional rate rise.

As indicated by the RBA, the market pricing suggests that they do not anticipate a cash rate cut until 2025, with a 40 per cent chance of one last rate rise this year. The March inflation read eased, but the pace of disinflation slowed, indicating a potential risk of inflation staying above target for longer than expected. Given the high level of uncertainty in the economic outlook, the RBA has chosen to maintain a relatively short-term perspective on inflation variations to avoid excessive fine-tuning and over-engineering in monetary policy adjustments. 

The RBA acknowledged that financial conditions as they stand are currently restrictive. They noted households to be primarily affected. Household debt repayments have continued to rise as a share of household income; they are experiencing cost of living pressures derived from inflated prices and increased mortgage repayments as households roll off their fixed-rate mortgages and reprice at higher rates. Households do, however, have savings buffers which are assisting them with making additional mortgage repayments in some instances. As expected, households are placing greater importance on making mortgage repayments rather than spending on discretionary items, overall contributing to the reduction in consumer spending and consumption growth. The latest Government budget will assist eligible households with the introduction of tax relief and cost of living relief. Although this could prove to be a set back for inflation and an additional risk for the RBA to consider.

The “neutral rate” which is the cash rate that would be at a level that is consistent with monetary policy being neither expansionary or contractionary, is difficult to ascertain. Although the RBA highlighted that the current cash rate at 4.35 per cent is above most estimates derived from a range of models. The balance is difficult to achieve as the RBA intends to maintain the progress that has been made in the labour market, whilst attempting to compress spending and economic expansion to the extent required to bring inflation back within target by mid 2025. 


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