A longer meeting, but an expected outcome – the case to hold outweighed the case to hike.
This month’s minutes were the first under the new arrangements with longer meetings. While the list of attendees was longer – including the Chief Communications Officer – the minutes themselves were only marginally longer than the previous month’s version (just over 3000 words rather than just over 2800 in December) and scored similarly on standard readability statistics. Most of the additional text was devoted to some discussion about messaging, in the final section of the document.
Global growth has slowed to below trend, and the Board expects it to ease further this year. Outside the United States, consumption growth was slow despite positive growth in real household incomes. This is part of the normal response to tighter monetary policy. However, it stands in contrast to the two years of decline in real household disposable incomes in Australia.
The Board was encouraged by the slowing in inflation overseas. It drew attention to the decline in non-housing services inflation, attributing this to easing labour market conditions and an improved balance between demand and supply. On the face of it, this link points to reason for optimism that Australia might see a similar decline in non-housing services inflation with only a minor increase in unemployment. While the RBA’s assessment of labour market conditions goes beyond the unemployment rate, it would be unusual for overall conditions to ease significantly without some increase in this measure. At this point, most peer economies have seen only a small (or in the euro area as a whole, non-existent) increase in unemployment. This raises the question of just how far unemployment needs to rise to achieve the desired disinflation. Some overseas experience would suggest not much.
As in Australia, housing-related inflation has been very strong in a range of advanced economies, and not only those that have seen population surges.
Turning to the domestic situation, the minutes acknowledged that aggregate demand has slowed, and the role of inflation, tax and interest rates in producing this result. Still, the level of demand was assessed as exceeding supply. The presumption is that it is demand that must move to make up most of the gap. While the minutes recorded some discussion about the possibility that productivity might rebound from pandemic-affected levels, the implication that supply would thereby expand was left unmentioned.
Inflation in Australia declined more in the December quarter than the RBA had expected. However, the minutes highlighted that there was not much more disinflation to be had from the goods component, and that services inflation had declined only a little. (It should be noted that the RBA’s preferred measure of market services inflation, as shown in Graph 2.23 of the latest SMP, has declined by less than some other measures of services or market services inflation that are compiled on slightly different bases.)
Domestic financial conditions were acknowledged to be restrictive, but uneven. The effects on household cash flows and debt payments were noted, along with the incentives to save rather than spend induced by higher interest rates. Credit growth had slowed from its early-2022 peak and stabilised more recently.
The minutes mentioned that the Board considered two scenarios other than the central case: one where inflation expectations dislodge, and another where consumption is weaker than expected. Such scenarios have long been part of the RBA toolkit. Scenarios calibrated on different assumptions about social distancing restrictions were presented during the peak of the pandemic. Similarly, the SMP chapter on the outlook has for some time included a statement in the risk section outlining the effects on inflation of a larger unwind of the run-up in global goods prices.
As expected, the Board considered both the case to raise the cash rate target and the case to leave it unchanged. The Board was starting from a presumption that Australia has a problem of excess demand and that this will persist for a while. The central forecast was, however, that inflation would decline on the same path that the Board had previously deemed acceptable. Moreover, the risks that inflation will remain higher than forecast had diminished. The Board acknowledged that the data flow since the last meeting had given them more confidence in the central forecast of inflation returning to target. This strengthened the case to hold compared with the situation late last year.
Overall, this month’s minutes did not add much information to the raft of RBA written communication and Parliamentary appearances in the past two weeks. We continue to expect the RBA to be on hold for a number of months before beginning to cut rates later in the year. While the Board did not rule out a further rate increase, the recent data flow has been consistently pointing in the opposite direction. In our view, the most likely date for the first cut remains September. There are of course considerable uncertainties in the outlook. We will continue to monitor the data and outlook for any shifts in the risks around the trajectory for disinflation.
