RBA interest rates: February rate cut doesn’t guarantee two in a row, says Reserve Bank board minutes

The Reserve Bank’s board expressed caution about future policy easing after cutting interest rates for the first time in four years, minutes of its February meeting showed, worrying that rapid moves could jeopardise inflation’s return to the 2.5 per cent midpoint of its target. The board discussed scenarios in which policy would be eased to boost economic growth or stay at current restrictive levels, according to minutes of the February 17-18 meeting released Tuesday. The board concluded that the case to lower rates by 25 basis points to 4.1 per cent was the “stronger one” as upside risks to inflation had abated enough that it no longer needed the insurance that it had taken out 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,” the minutes showed. “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.” As a result, future decisions will be guided by incoming data, the minutes showed. Financial market pricing implies the RBA will cut at least two more times to bring the cash rate to 3.6 per cent by year-end. The minutes shine a spotlight on why governor Michele Bullock sounded cautious last month after the board met market expectations to deliver a rate cut. While consumer prices have eased back from the very high rates reached in the immediate post-pandemic period, core inflation remains above the top of the RBA’s 2-3 per cent target and it’s unlikely to hit the mid-point through the bank’s forecast horizon. In expressing caution, members also noted that Australia has been a global outlier in the post-pandemic cycle by not raising rates as far as other developed world economies did while its labour market remains in a much stronger position than most peers. The board “tended to place more weight on the downside risks to the economy”, the minutes showed. “Members were particularly mindful of the risk of keeping monetary policy tight for too long.” Another reason for treading carefully was the implication of leaving rates at 4.35 per cent. Ms Bullock’s deputy Andrew Hauser had foreshadowed last month that the rate-setting board looked at an alternate scenario in which policy was unchanged this year and that resulted in core inflation undershooting the 2.5 per cent target midpoint. The minutes also mentioned this, though no further details were provided. The minutes also signalled that the RBA is still sensitive to the possibility that consumption and the jobs market remain strong enough to frustrate efforts to bring core inflation down to target. Underlining the mixed economic outcomes lately, data out after the RBA’s meeting showed Australia’s labour market remains strong with unemployment at a still low 4.1 per cent. Ms Bullock has suggested that labour market tightness will be a key area to watch, with additional job strength having the potential to rekindle price pressures. The RBA’s next meeting is on April 1. Bloomberg