RBA considered a rate hike during May meeting, minutes show

Investing.com-- The Reserve Bank of Australia considered increasing interest rates during its May meeting, the minutes of the bank’s meeting showed on Tuesday, as it grappled with a sticky outlook for inflation. 

The RBA had left its official cash rate target unchanged at 4.35% in April, and had struck a somewhat less hawkish tone than markets were expecting. While the bank did acknowledge that inflation was turning sticky, it did not explicitly mention the possibility of another rate hike.

But the minutes of the meeting showed that policymakers had indeed considered a rate increase, especially amid concerns that inflation will not ease as quickly as initially forecast. 

While consumer spending slowed in Australia, it still remained relatively high, underpinning inflation. Tight labor market conditions also factored into sticky inflation. 

“A higher cash rate might also be required, even with ongoing weakness in aggregate demand, if other factors slowed the pace of disinflation.” the RBA said in its minutes. 

“This could occur if trend productivity growth turned out to be weaker than assumed, unless wages growth were to moderate in response. A drift higher in inflation expectations, should it occur, would also make it more costly to return inflation to target.” 

But the RBA decided to ultimately leave rates unchanged, with members of the rate-setting committee still seeing a path back to the bank’s 2% to 3% inflation target by mid-2025, and that risks over inflation were still largely balanced. 

The outlook for future rate decisions remained cloudy, amid uncertainty over the path of the economy.

Still, the RBA expects Australian economic conditions to cool further in the coming months, and that the labor market will also deteriorate. These trends are expected to help inflation meet the bank’s target within its forecast period.

The RBA hiked rates by a cumulative 425 basis points since 2022, as it moved to combat a post-COVID spike in inflation. While this did pull inflation from 30-year peaks, the pace of disinflation has largely slowed in recent months.