The Reserve Bank of Australia (RBA) Board was cautious about continuing to cut official interest rates, despite last month approving the first easing in monetary policy since 2020, according to the minutes of the last meeting.
The Board members said the decision to cut rates by 25 basis points to 4.1% at the meeting on 17 and 18 February did not commit them to further reductions at subsequent meetings because of the risks surrounding the decision.
The risks included inflation remaining more persistent, labour market conditions staying tighter and economic growth picking up faster than previously expected, or that monetary policy had not been sufficiently restrictive.
“In light of these considerations about the risks surrounding the Board’s decision, members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” they said in the Minutes of the Monetary Policy Meeting of the Reserve Bank Board.
“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, members expressed caution about the prospect of further policy easing, which could also be seen in the forecast for inflation based on the market path.”
The RBA minutes said members tended to place more weight on the downside risks to the economy. In addition, they placed weight on the possibility that capacity in the labour market might be broader than embodied in the central projection.
“Given these judgements, members were particularly mindful of the risk of keeping monetary policy tight for too long, with adverse impacts on economic activity, the labour market and inflation,” the minutes said.
RBA board members observed that the central forecast for inflation to settle slightly above the midpoint of the 2–3% target range over the medium term was predicated on three to four reductions in the cash rate target over the year or so ahead.
An alternative projection, in which the cash rate was left at 4.35% for an extended period, showed underlying inflation undershooting the midpoint of the range over the medium term.
The meeting minutes also covered financial conditions, international and domestic economic conditions and monetary policy considerations, along with the decision itself.
