Rate cut doesn’t commit Reserve Bank to further easing, minutes reveal

The RBA has hosed down expectations that its February rates decision implies it will deliver further interest rate cuts.

Meeting minutes, released on Tuesday, gave further detail behind the Reserve Bank’s decision to cut interest rates on February 18. Picture: AFP

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The Reserve Bank has hosed down expectations that its February interest rate decision implies it will deliver further cuts, cautioning that rapidly easing borrowing costs could jeopardise its inflation-fighting efforts.

Minutes for the central bank’s February 17-18 meeting showed the RBA board considered the case for delivering a quarter-percentage-point rate cut or holding the cash rate at its previous level of 4.35 per cent.

While the board concluded that the case to lower the cash rate to 4.1 per cent was “the stronger one” as a faster-than-­expected decline in underlying inflation meant it no longer ­needed its “insurance” hike of November 2023, it expressed ­caution about the prospect of further cuts.

“Members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” read the minutes, released on Tuesday.

“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’s post-meeting press statement, released a fortnight ago, noted the board was “cautious” about a further easing of monetary policy.

Gareth Aird, head of Australian economics at Commonwealth Bank, considered the board minutes to be “hawkish” even as it had ultimately decided to cut the cash rate.

“The tone of the minutes today implies the board is unconvinced that further easing is necessary over the period ahead,” Mr Aird said.

In a blow to Labor’s hopes of further interest rate relief, the RBA is not expected to deliver a cash rate cut at its next meeting, scheduled for March 30-April 1, which could lend further support to the Albanese government’s re-election efforts.

Money markets are instead fully priced for a further two quarter-percentage-point rate cuts from July, which would take the official cash rate to 3.6 per cent by the end of the year.

The minutes underline RBA governor Michele Bullock’s decision to tread carefully during last month’s interest rate decision, where the central bank trimmed borrowing costs for the first time in four years.

While underlying inflation has eased sharply, falling to 3.2 per cent in the December quarter, and was the key reason for its ­decision, it still remains above the RBA’s 2 to 3 per cent target band and is not expected to fall below 2.7 per cent over the RBA’s two-year forecast period.

In considering the reasons to leave the cash rate on hold, the RBA board was concerned by Australia’s still-tight jobs market, which could frustrate efforts to bring price pressures sustainably within its target band.

However, the board was presented with evidence showing underlying inflation could undershoot the midpoint of the RBA’s 2 to 3 per cent target band, had it held the cash rate at 4.35 per cent over an “extended period”.

In making the decision to cut, board members were also “particularly mindful of the risk of keeping monetary policy tight for too long,” having particular concern for the “downside risks” to the Australian economy.

Even as Ms Bullock revealed in her post-meeting press conference that the board ultimately reached a consensus decision to cut the cash rate, Citi chief economist Josh Williamson said the minutes suggested the outcome was a “close call”.

“The lengthy for-and-against arguments for rate cuts confirm that the board will continue to have communication challenges this year as it’s looking to ensure it does not provide meaningful forward guidance to the market,” Mr Williamson said.