Central bank stresses data-dependent approach as inflation risks remain
The Reserve Bank of Australia (RBA) remains cautious about further interest rate cuts after lowering the cash rate for the first time in four years, according to minutes from its February meeting.
The central bank warned that moving too quickly could hinder efforts to bring inflation back to its 2-3% target range.
Minutes from the RBA meeting revealed that the board weighed scenarios of either maintaining the current policy stance or easing rates further to support economic growth. Ultimately, it decided to reduce the cash rate by 25 basis points to 4.1%, concluding that inflation risks had moderated enough to no longer justify the tighter policy stance adopted in November 2023.
“Members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” minutes of the February 17-18 meeting stated. “While economic outcomes had given members more confidence that they could return inflation to target at the same time as preserving most of the gains in the labour market with a lower cash rate, they agreed that this was not yet assured.”
The RBA emphasised that future policy decisions would depend on economic data. Financial markets are pricing in at least two more cuts this year, which would bring the cash rate down to 3.6% by December.
The minutes also shed light on why RBA governor Michele Bullock (pictured above) expressed a cautious stance following the February rate cut. Although inflation has eased from post-pandemic highs, core inflation remains above the central bank’s target range and is not expected to reach the midpoint within the forecast period.
Board members acknowledged that Australia has taken a different approach compared to other advanced economies, as it did not raise rates as aggressively. Meanwhile, the country’s labour market remains stronger than many of its global peers.
“Members tended to place more weight on the downside risks to the economy, and on the possibility identified by the staff that capacity in the labour market might be somewhat greater than embodied in the central projection,” the minutes stated. “Given these judgements, members were particularly mindful of the risk of keeping monetary policy tight for too long, with adverse impacts on economic activity, the labour market and inflation.”
The RBA also remains watchful of household consumption and labour market strength, which could slow inflation’s return to target. Despite some signs of economic weakness, Australia’s unemployment rate stood at 4.1% in the latest data, highlighting ongoing labour market resilience. Bullock has identified employment conditions as a key factor in inflation trends.
The RBA’s next policy meeting is scheduled for April 1.
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