Reserve Bank holds the course but reinjects risk of a rate rise into conversation

The Reserve Bank board has given little hope of rate cuts in the short term and hinted of another rate rise in the event inflation data exceeds expectations.

Reserve Bank governor Michele Bullock during her press conference on Tuesday. Picture: Nikki Short

The Reserve Bank board has given little hope of rate cuts in the short term while warning of another rate rise in the event that upcoming inflation data overshoots its expectations.

In a widely expected decision the board left rates on hold at a 12-year high of 4.35 per cent after its meeting, but again warned that disinflation was taking longer than expected despite a risk that sustained economic weakness could cause a “noticeable deterioration” in the labour market.

After lifting its cash rate target from a record low of 0.1 per cent to clamp down on inflation after the pandemic, the board vowed to stay “vigilant to upside risks” even as it continued to see a risk that “household consumption picks up more slowly than expected”.

The board repeated that its vow of “not ruling anything in or out” on interest rates “remains resolute in its determination to return inflation to target”.

In a hawkish twist, it threatened to “do what is necessary to achieve that outcome”.

“The RBA board does not want to lift the cash rate again, but a June quarter trimmed mean CPI north of 1 per cent on-quarter would test the board’s resolve not to tighten policy further,” CBA head of Australian economics Gareth Aird said.

While the consensus among financial markets economists has shifted to predict that rates won’t be cut until February, CBA, Westpac and NAB still expect the RBA to cut rates in November.

In her post-meeting press conference, RBA governor Michele Bullock said the board again discussed the case for a rate rise at its June meeting but did not discuss the case for cutting rates.

Still, Ms Bullock pushed back on suggestions that the cash for another rate rise was increasing.

“What I would say, and I think we’ve tried to reflect this in the statement, is that there’s been a few things that have made the board alert to the upside risks, so I wouldn’t say it’s increasing,” she said.

“If it looks like inflation is not coming sustainably back in the band within a reasonable amount of time. That just increases the risks that inflation expectations will adjust, and that will make it harder to get inflation down in the future.”

Consumption growth was on the board’s “list” and upward revisions to consumption growth in the national accounts could be interpreted in two ways, according to Ms Bullock.

“One is that people are saving less to support their consumption because they’re very confident about the future,” she said.

“The other way you can interpret it is that people are really hurting.”

AMP chief economist Shane Oliver said the RBA board was “a bit more hawkish than in May, suggesting more risk of a hike than a cut in the near term”.

“We continue to see rates as having peaked, with rate cuts starting late this year,” Dr Oliver said.

“However, the risk of another hike is high if inflation surprises on the upside again this quarter.”

Ms Bullock said monetary policy was at a “really complex past of the cycle”.

“We’re looking to bring inflation down to target while maintaining the gains in the labour market that we’ve seen over the past couple of years,” she said.

“Inflation is still above central bank targets in many economies, it is proving to be sticky, and the progress in getting inflation down has slowed.”

The board also repeated its hawkish note on the disappointing pace of disinflation, saying that price growth was falling “more slowly than previously expected and it remains high”.

“The board expects that it will be some time yet before inflation is sustainably in the target range,” it said.

The RBA last month predicted inflation would hit the middle of its 2-3 per cent target band in mid-2026.

While repeating that higher rates had been “working to bring aggregate demand and supply somewhat closer towards balance”, the board continued to warn of “continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-­labour inputs”.

“Conditions in the labour market have eased further over the past year, but remain tighter than is consistent with sustained full employment and inflation at target,” it said.

“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth.”

The nation’s unemployment rate has hovered around 4 per cent in recent months, in line with the RBA’s latest forecast for the June quarter below its estimate of the so-called non-accelerating inflation rate of unemployment, or NAIRU, which it recently pegged at 4.3 per cent.

But Australia’s wage cost index for the March quarter rose 4.1 per cent year-on-year, below the market consensus estimate of 4.2 per cent.

Economic growth of 1.1 per cent was the weakest growth apart from the Covid-19 pandemic period since the early 1990s recession.

Asked how many inflation reports the RBA would need to see before considering cutting interest rates, Ms Bullock said the CPI for the June quarter was “going to be important in looking at the trajectory for inflation”.

“The challenge for us, which is almost unique to us … we only have quarterly CPI (so) it’s very difficult to get a read on momentum,” she said in her post-meeting press conference.

“So yes, the CPI will be important for the June quarter … we’re going to have to look at the unemployment situation, the employment data – the suite of employment indicators that we have – which you see now in the statement on monetary policy.

“So I wouldn’t say there’s a particular number of times we need to look at CPIs … we’re going to be looking at all sorts of data coming through. But the June CPI is going to be an important one because it’s going to give us a much more comprehensive view of what’s going on.”