Line-ball call on rates

RBA minutes show decision to hold was a close one

Aussies have been warned that economic uncertainty remains “high” and the Reserve Bank could go either way on interest rates.

The RBA on Tuesday released the minutes of its February meeting, where it left the official cash rate on hold at 4.35 per cent.

The minutes show that the central bank board considered further tightening but ultimately opted to spare mortgage holders more pain and instead wait for more data.

But the decision was a close one, according to the minutes, which say “uncertainty about the outlook for the economy was high”.

“Members also observed that the costs of inflation not returning to target within the envisaged time frame were potentially very high,” the minutes say. “Given this, members agreed that it was appropriate not to rule out a further increase in the cash rate target.”

February’s board meeting was the first held under sweeping changes adopted by the institution following an independent review commissioned by Treasurer Jim Chalmers.

Over the 2½-day affair, board members considered the case for and against another rate hike, amid presentations from RBA staff about the state of the economy and markets.

The board meeting minutes show there are early signs of inflation easing but the board remains cautious.

Inflation has slowed from a peak of about 8 per cent at the end of 2022 to about 4 per cent at the end of 2023.

The board said it still expected inflation to return to its target range of 2-3 per cent in 2025, reaching the midpoint in 2026, but that it was still “well above target”.

“Members noted the moderation in inflation had been driven by softer goods price inflation and that any further slowing in this component was likely to be modest,” the minutes showed.

“By contrast, services price inflation remained high and had declined only a little.

“The case to raise the cash rate further centred on the observation that it would take some time for inflation to return to target and for the labour market to full employment.

“Inflation was expected to take a further two years or so to return towards the midpoint of the target range under the central forecast.”

In considering whether to increase the cash rate, the minutes noted a rise would not prevent the board from cutting rates if “the economy were to weaken more sharply than envisaged”.

The bank decided the case against the rate rise was stronger, noting the risk of inflation not returning to its target range within a “reasonable timeframe” had eased.

The board said the status quo call would “best balance” the “board’s objectives for price stability and full employment”.