Minutes of the Reserve Bank's November meeting, published on Tuesday, reveal the board discussed several potential scenarios that may have warranted a change in monetary policy before ultimately deciding to hold the cash rate steady.
Australia's cash rate last moved a year ago, when the board elected to hoist it to its current 12-year peak of 4.35%.
One of the scenarios discussed during the meeting on 4-5 November centred around household spending on goods and services, otherwise known as consumption.
The central bank considered whether persistent weakness in consumption, despite increased household cash flow, could justify a cash rate cut.
RBA board grapples with uncertainties
"Members agreed that if consumption proves to be persistently and materially weaker than the staff forecast, and this was judged likely to lower inflation significantly, a reduction in the cash rate target could be warranted," the minutes read.
RBA's updated Statement on Monetary Policy (SMP) acknowledged a weaker outlook for consumption.
The November SMP forecasts household consumption growth of 1% in the December quarter, down from 1.5% projected in August.
Another scenario supporting the case for a rate cut involved a significant easing in labour market conditions, which could accelerate inflation's return to target.
"This could occur if firms are currently hoarding labour and are prompted to unwind this stance in the future," the minutes stated, though they added, "such trends were not yet widely apparent from the RBA's liaison with firms."
The annual headline inflation rate came in at 2.8% in the September quarter, slowed by declines in electricity and fuel prices.
However, the RBA puts more weight on trimmed mean figures.
Excluding items with volatile price changes, which included those aforementioned, the trimmed mean measure stood at 3.5%.
The minutes also discussed a scenario in which constrained supply capacity could necessitate a rate hike.
The board members noted that "wages growth would need to slow even further to enable a return to the inflation target if productivity growth does not increase as assumed".
Despite these risks, the rate-setting committee expects household consumption to pick up as real incomes rise, strengthening the case that keeping the current policy as is is the right course to take.
RBA signals a shift into a forward-looking approach
Amid uncertainties about how restrictive its current policy settings are, the minutes suggest the RBA board is adopting a little more forward-looking approach to its decision-making process.
"It is important to remain forward-looking, avoiding an excessive reliance on backward‑looking information that might lead the board to react too late to a change in economic conditions," the minutes read.
This is an interesting shift from the Reserve Bank's heavy reliance on data.
For reference, its August meeting minutes highlighted that members noted, "it was appropriate to continue placing somewhat greater-than-usual weight on the flow of data".
However, one line in the latest minutes that reads, "members would rely upon the data and the evolving assessment of risks to guide the board's future decisions," is somewhat at odds with the statement above.
"The November Minutes make it unclear just how forward-looking the board is willing to be as compared with still being highly dependent on backward-looking data," CBA chief economist Gareth Aird said.
Is a February rate cut likely?
Based on today's minutes, major bank economists remain uncertain whether the RBA will begin the easing cycle in February 2025 as three of the Big Four banks expect.
"The discussion highlights that a rate cut as soon as February looks very unlikely given policy is only modestly restrictive and the uncertainties the RBA is grappling with are unlikely to be resolved that quickly," noted Tapas Strickland, NAB head of markets economics.
NAB recently delayed its rate cut call from February to May, citing persistently strong labour market data.
From there, the bank predicts one cut per quarter, bringing the cash rate to 3.10% by mid-2026.
NAB's peers, CBA, ANZ, and Westpac, maintain their forecasts for a February start to cash rate cuts.
However, the minutes left economists at CBA "unsure" of the timing of the RBA's easing cycle, with Dr Aird also acknowledging the possibility of a delayed start.
"In particular, we think that the RBA will be more willing to leave policy on hold for an extended period if the unemployment rate has not moved much higher over the next three to six months," Dr Aird said.
CBA expects 100 basis points of easing over 2025, with the cash rate ending the year at 3.35%.
Image courtesy of the Reserve Bank of Australia
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