Reserve Bank of Australia: Board minutes reveal three economic triggers that could bring interest rate relief

Minutes from the most recent interest rate meeting of the Reserve Bank suggest that rate cuts may not occur in 2025 as inflationary factors remain top of mind.

The RBA disappointed punters when it left rates on hold at 4.35 per cent shortly before the Melbourne Cup was run, making it a full year since rate relief.

The minutes reveal that inflation remained the number one concern for the RBA which looked past the impact of the government’s energy rebates.

“Members... would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable,”

“Underlying inflation – as indicated by the ‘trimmed mean’ measure – remained too high and... forecasts did not see inflation returning sustainably to target until 2026,” the minutes said.

According to Fortlake Asset Management chief investment officer, and former RBA economist Christian Baylis, the bank iscaught between competing scenarios of stable employment and sticky services inflation on the one hand, with six consecutive quarters of declining GDP per capita on the other.

“Given the significant increase in rates three years ago, we have still not seen the economy keel over,” Mr Baylis said.

“It would appear the focus of the RBA is slowly tilting to upside risks to the inflation forecast which would result in the cash rate remaining where it for longer: that is no cuts in 2025.”

Three scenarios clouding the horizon

The minutes showed that consumer spending, labour productivity and the global economy were the top future scenarios modelled by the Bank in their deliberation.

While the Bank identified signs of recovery, household consumption growth remained weaker than expected, with “subdued consumer sentiment” and concerns about “real household income growth”.

The bank found the Stage 3 tax cuts and energy rebates had not led to a significant increase in consumption growth.

“If consumption proves to be persistently and materially weaker than the staff forecast ... a reduction in the cash rate target could be warranted,” the RBA wrote.

The RBA minutes come as more recent data suggests confidence in the economy is rising, with the latest Westpac-Melbourne Institute consumer survey revealing a 5.3 per cent rise in sentiment during November. The ANZ-Roy Morgan consumer confidence survey, out today showed that optimism is on the rise. The survey found that confidence in the 12-month economic outlook has risen 10.7 points since early July, while confidence regarding personal finances over the next 12 months gained 8.2 points in that time.

If consumption picks up however, the bank suggested that rates may have to stay higher for longer.

“Members highlighted that the current monetary policy setting might need to remain in place for longer than assumed if the recovery in consumption proved sharper than the forecast envisaged,” the minutes said.

The global outlook was also a concern, with some hope of a boost from Chinese stimulus but concerns about the economic impact of the US elections.

The RBA noted risks stemming from “a marked change in US economic policy following the US presidential election”, and uncertainties around “how other countries respond”.

Speaking at a business conference last week, RBA governor Michele Bullock elaborated on a scenario of Mr Trump acting on his campaign promise of high tariffs on China.

“What ultimately happens for Australia is going to be dependent on the responses of other countries,” Ms Bullock said.

“In the very extreme circumstances of 60 per cent tariffs on Chinese we don’t know how the Chinese will respond to that. Ultimately, if it’s not good for the Chinese economy, it isn’t good for us either.”

The Bank had upgraded its forecasts for the Chinese economy based on recent stimulus but noted that income growth remained weak and the property market continued to be subdued. The minutes showed that the RBA less confident that Chinese stimulus would give a boost to economic conditions in Australia.

“Members considered various channels through which economic stimulus in China could support the Australian economy. They concluded that the implications for Australia could be more modest than in the past because the capacity of the mining sector to increase Australia’s volume of mineral exports was limited. Moreover, it was unlikely that the sector would invest as heavily to expand this capacity as it had in the past,” the minutes said.

Alongside high underlying inflation at 3.5 per cent and the RBA cautioned that conditions in the labour market were sufficiently tight to not warrant a rate cut.

The bank also called out the issue of low productivity and said “persistent weakness in productivity growth... could also boost inflation over the forecast period if wages growth did not adjust.”

How the labour market performed going forward was a key concern: “If forward-looking indicators began to suggest a widespread easing in prospective labour market conditions and a more rapid easing in inflation, the board might need to consider a policy response.”

In October, labour force data showed an unexpected drop in job numbers for the first time in seven months. However, the broader labour market remains strong, with measures of spare capacity staying steady or tightening further, reflecting recent stability in forward indicators.

The ANZ-Roy Morgan consumer confidence survey suggested that worker expectation of a wage hike had moderated, which would be encouraging for the RBA.

“Inflation expectations eased, possibly in response to last week’s Wage Price Index report, which showed a broad-based deceleration in wage growth. The data are likely to give the RBA more confidence that wage growth is returning to a rate that is consistent with its target of 2 to 3 per cent inflation,” said ANZ Economist, Madeline Dunk.

Economists have pushed out their forecasts for an interest rate cut from February to May on the expectation that Mr Trump’s policies on tariffs and tax cuts would result in US inflation spilling over to Australia.

In earnings reports released earlier this month, big four bank chief executives also pushed out their hopes for a rate cut.

“[Trump’s policies] would tend to be more inflationary than not,” said ANZ chief Shayne Elliott. “It would tend to suggest less and later rate cuts over here.”

While higher rates have been squeezing homeowners, the banks have reported that they are not seeing growth in loan delinquencies, and executives were buoyed by the fact that hardship applications had stayed flat after peaking earlier in the year.