Minutes of the Monetary Policy Meeting of the Reserve Bank Board

Hybrid – 17 and 18 June 2024

Members participating

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor), Ian Harper AO, Carolyn Hewson AO, Steven Kennedy PSM, Iain Ross AO, Elana Rubin AM, Carol Schwartz AO, Alison Watkins AM

Others participating

Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), James Holloway (Deputy Head, Economic Analysis Department)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Meredith Beechey Osterholm (Future Hub), Sally Cray (Chief Communications Officer), Marion Kohler (Head, Economic Analysis Department), Carl Schwartz (Acting Head, Domestic Markets Department), Penelope Smith (Head, International Department)

International economic conditions

Members began their discussion of international economic developments by noting that recent data had confirmed that output growth in most advanced economies had troughed and that upside risks might be crystallising in some regions. Forecasters had revised up their expectations for growth in advanced economies for the current year, reflecting stronger-than-expected data for the March quarter amid improving global business sentiment. Nonetheless, restrictive monetary policy was still weighing on demand in most advanced economies and conditions in labour markets were also easing, although generally they remained tight.

Members observed that inflation was still above central bank targets in most economies, and services price inflation had generally been stronger than expected since the start of the year. However, in some economies where output gaps were clearly negative, such as Canada and Sweden, services price inflation had continued to moderate.

Indicators of activity for the Chinese economy had softened a little following strong growth in the March quarter, but the staff’s outlook for growth in 2024 had not changed. China’s external demand remained strong and was being supported by the nascent recovery in activity in advanced economies. Members observed that the recent announcement of new US and EU tariffs on some Chinese imports was further evidence of the increasing risk of broader trade tensions.

Domestic economic conditions

Turning to the domestic economy, members discussed the national accounts data for the March quarter. They noted the staff’s assessment that aggregate demand had continued to exceed aggregate supply but that the gap was closing. Growth in GDP had been weak, reflecting subdued activity in the more interest rate-sensitive parts of the economy, such as retail spending and housing construction. Relative to expectations, growth in overall household and public consumption in the March quarter had been stronger than expected while other components had surprised on the downside. Members considered the implications for future growth of developments in these components.

The level of consumer spending over the preceding 18 months had been revised upwards. Much of the upside surprise had been driven by large revisions to overseas travel, which were recorded as imports and so did not alter the measure of overall GDP. Estimates of household income had been little changed, implying downward revisions to estimates of the saving rate. These revisions had brought consumption growth more into line with the usual historical relationships with household income and wealth. Members assessed the signal to take from these revisions. One interpretation was that, on average, households were not being as cautious in their spending as previously thought. Another was that the fall in the saving rate would leave households even more financially squeezed than previously assessed. Members agreed that distinguishing between these alternative hypotheses was important in assessing the outlook for activity and inflation. But any conclusion could only be tentative, given that estimates of savings are prone to significant revision. Further, the latest estimates portrayed a different picture than that derived from data on mortgage-holders’ offset accounts, which showed that households were making larger extra payments than prior to the pandemic.

Since the previous meeting, a number of Australian governments had released their budgets for 2024/25. Energy rebates and rent assistance would lower headline inflation in 2024, though this direct effect would be reversed later in 2025. Members noted that the staff would incorporate an assessment of the impact of the budgets on the outlook for output and inflation in the August forecasting round.

The labour market was still assessed as tight relative to full employment, though conditions had continued to ease gradually in recent months as expected. The easing in the labour market since late 2022 had occurred through an increase in the unemployment rate, a decline in average hours worked and fewer job vacancies. Employment growth had slowed over this period to be around the pace of growth in the working-age population. Recent employment growth had been supported by growth in industries where public funding was important.

Members noted that wages growth had likely passed its peak for the current cycle. The easing in wages growth over the year to the March quarter had been broadly based, but outcomes in public and private enterprise bargaining agreements had been a little below expectations. Nonetheless, it was too early to determine if this signalled a more rapid easing in aggregate wages growth than currently expected. The Fair Work Commission’s decision on award wages, which had been largely in line with expectations, would see award-linked wages growth step down this year. The implication of wages growth for inflation depended on its effect on unit labour costs, growth in which had moderated recently but remained high.

Members discussed recent information from the RBA’s liaison program. Firms were continuing to report upward pressure on costs, stemming from a range of sources. At the same time, firms in consumer-facing industries were reporting that it was becoming more difficult to raise prices, resulting in a narrowing of margins. Members noted that businesses appeared to be more focused on improving efficiency than they had been for some time, but obtaining internal approval for investments to automate processes was sometimes difficult as firms continued to look for ways to manage cashflow. They also noted the data showing a sharp increase in business insolvencies, although the share of firms entering bankruptcy remained in line with its historical average.

Inflation remained above the target range and had been a little higher than expected in prior months. The monthly CPI indicator for April had exceeded expectations because of stronger-than-expected durable goods price inflation. However, there had been limited information about market services price inflation since the May meeting. Members acknowledged that these (limited) inflation data had increased the risk that sustainable progress towards the inflation target may be slower than forecast.

Members judged that longer term inflation expectations in Australia were still anchored but should continue to be monitored closely. Several measures of inflation expectations had drifted up in recent years to be around the midpoint of the target band, after having been below target during the low-inflation period prior to the pandemic. Part of the increase in market-implied measures of inflation compensation over preceding years appeared to reflect larger premia to compensate for the risk that inflation turned out to be higher than expected. Members acknowledged that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target, with adverse implications for growth in output and employment.

Financial conditions

Market participants’ expectations for the path of central bank policy rates in advanced economies were little changed since the May meeting, after increasing steadily in the first few months of the year. Market participants’ implied expectation continued to be that policy rates for most major central banks were around their peak, with cuts priced in over the second half of 2024. As expected, the Bank of Canada, the European Central Bank and Sveriges Riksbank had reduced their policy rates in response to weaker-than-expected indicators of economic activity, the emergence of spare capacity and progress on disinflation. However, these central banks had stated that they judged their monetary policy settings still to be restrictive and may need to remain so for some time. Other advanced economy central banks were waiting for more evidence that inflation would return to target sustainably. In particular, the US Federal Reserve had highlighted the persistence of inflation, resilient economic activity and ongoing labour market tightness.

Sovereign bond yields in most advanced economies had declined a little since the May meeting. But yields were still higher than at the start of the year and when central banks had commenced raising policy rates. At the same time, some measures of global financial conditions had eased since late 2023. A range of risk asset prices, including equity prices, had risen further. Corporate bond yields had also risen by less than government bond yields since the start of the year, and conditions in international wholesale funding markets remained favourable. Members noted the volatility in European financial markets that had occurred following the European parliamentary elections.

In China, credit growth had moderated, particularly for the household sector, against the backdrop of ongoing stress for property developers. The authorities had implemented new measures to address weakness in the property sector, including by providing funding to allow state-owned enterprises to purchase unsold homes from developers. Members noted assessments that these measures would provide helpful support to the property market but were not sufficiently large to affect prospects for the sector materially.

For Australia, members concluded that overall financial conditions were restrictive, based on a range of measures. This was most notable for households and less so for large businesses.

Required household debt payments had risen further. The rise in these payments had put pressure on the budgets of debtors and had contributed to the weakness in consumption growth. Despite the drag on income from cost-of-living pressures and higher required debt payments, extra mortgage payments were now a little above their pre-pandemic average. This is consistent with the incentive for debtors to reduce their net debts where possible when interest rates are high. Members acknowledged, alternatively, that this could reflect concerns about the economic outlook. By contrast, the (gross) saving rate had declined to be around 2½ percentage points below its pre-pandemic average, following substantial revisions to consumption in the March quarter national accounts. Members discussed how the fall in the measured saving rate and the rise in extra mortgage payments might be reconciled.

Household credit growth was somewhat below average but had picked up a little in 2024. After accounting for the extra payments into offset accounts, housing credit growth had been further below average and had not picked up. Moreover, household credit outstanding had been declining as a share of household disposable income. By contrast, business credit growth had remained a little above its post-global financial crisis average and larger firms had continued to raise significant funds from bond markets this year, despite materially higher interest rates.

Market pricing implied that markets were not expecting a near-term change in the cash rate, having earlier priced in some prospect of an increase. A rate cut was now not fully priced in until March 2025. The median expectation of market economists was also for the first reduction in the cash rate to occur in March 2025, about three months later than expected at the time of the previous meeting. Further ahead, market pricing implied that the cash rate was expected to converge to a similar level to the policy rates in many other advanced economies in coming years. The expectation by market participants of later and fewer cuts than in other advanced economies might have reflected their assessment that the cash rate was closer to estimates of the neutral rate, in large part because the cash rate had not been increased to the same extent in Australia.

The Australian dollar had appreciated slightly since the May meeting and, on a trade-weighted basis, was near the top of the range observed since early 2022.

Considerations for monetary policy

Turning to considerations for the policy decision, members noted that there had been several pieces of information since the May meeting that indicated a need to remain alert to upside risks to inflation.

There had been further evidence that global growth had troughed in late 2023 and was gradually picking up, while disinflation had slowed in several countries. In Australia, inflation had also been higher than expected in April. And the revisions to historical estimates of consumer spending meant that consumption growth, while still weak, had been more resilient than previously assessed.

Against this, members noted that GDP growth in Australia in the March quarter had been very weak and slightly lower than had been expected. There had also been further evidence that wages growth had likely peaked in late 2023. The labour market was continuing to ease gradually, broadly in line with expectations.

Members noted that, despite restrictive financial conditions overall in Australia, growth in business debt had been a little above its post-global financial crisis average and the equity risk premium was low. A few other central banks had moved to a less restrictive policy stance by reducing their policy rates, while others were waiting for more evidence that inflation would return to target sustainably before easing.

Members discussed the evolution of some key judgements relative to those underpinning the staff’s forecasts in May. They noted that, on one view, the revisions to historical estimates of consumption challenged the earlier judgement that consumer spending would pick up only modestly as aggregate real disposable income recovered. At the same time, it was possible to interpret the revisions as implying that households were under more financial pressure than previously assessed, given the decline in the saving rate. Members noted that the August forecast round would provide an opportunity for the staff to carefully review the extent of spare capacity in the labour market and the economy more broadly. They observed that judgements about measures of spare capacity were very uncertain and should be treated with caution when setting policy. And while monetary policy was restrictive, an important judgement was whether policy settings were sufficiently restrictive to return inflation to target within the timeframe implicit in the Board’s strategy.

Given these observations, members considered their decision on the cash rate.

Raising the cash rate at this meeting could be appropriate if members formed the view that policy settings were not sufficiently restrictive to return inflation to target within a reasonable timeframe. This could be the case if it was judged that inflation was returning to target more slowly than previously assumed or that the gap between aggregate demand and aggregate supply was not closing quickly enough.

Members noted that several pieces of new information could imply that demand was likely to hold up better than expected. The staff’s forecasts from May had incorporated significantly more weakness in consumption than implied by historical relationships with the forecasts for income and wealth; the revisions to the consumption profile had brought these variables into closer alignment over the prior 18 months. A gradual strengthening of the global economic cycle would also support demand in Australia. And financial conditions for businesses appeared to have eased a little over preceding months for some larger businesses. Collectively, these developments could limit the extent to which current policy settings were sufficient to bring aggregate demand back into line with aggregate supply. Moreover, recent inflation data – both domestically and from abroad – suggested some upside risk to the May forecast profile, since inflation was taking longer to abate than had previously been assumed. Members observed that the forecasts of several other central banks could be interpreted as implying that some spare capacity was necessary to bring inflation back to target within a reasonable timeframe, but that this was not the approach that had been adopted by the Board.

The case to raise the cash rate could be further strengthened if members judged that aggregate supply was likely to be more constrained than had been assumed. Members noted that productivity growth remained very weak. And while inflation expectations were judged to be consistent with the inflation target, the increase in the market-implied risk premium suggested a higher risk of an increase in inflation expectations more widely.

By contrast, the case to hold the cash rate steady at this meeting was based on the view that the economy was still broadly tracking on a path consistent with returning inflation to target in 2026, while preserving as many of the gains in employment as possible. Inflation had fallen significantly from its peak in late 2022, inflation expectations were assessed to be consistent with the Board’s target and there was evidence that the pace of wages growth had peaked in late 2023. Output growth had continued to be weak and the output gap was closing. Members also acknowledged that it might be wise to give little weight to the signal for inflation from some pieces of information received since the May meeting. In particular, there were several reasons not to place too much weight on the revisions to consumption, including that much of the upside surprise had been related to imports, and it was extremely difficult to assess spare capacity accurately in real time.

The case to hold the cash rate steady at this meeting would also be strengthened to the extent that risks to the outlook for the labour market were seen to be to the downside. Members observed that the fall in vacancy rates, for example, could be taken as an indication that labour market conditions were already weaker than implied by trends in employment. Moreover, the unemployment rate could rise quickly once it did start to rise, as had occurred in the past. Members acknowledged that, while the current rate of business failures as a share of all businesses was not unusual, a continuation of the rapid rise in insolvencies over coming months would have adverse implications for labour demand.

In weighing up these options, members judged that the case to leave the cash rate unchanged at this meeting was the stronger one. Members agreed that the collective data received since the May meeting had not been sufficient to change their assessment that inflation would return to target by 2026, despite some elevated upside risk around the forecast. In addition, members judged that there had not been enough evidence that the outlook for aggregate demand had strengthened, noting uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress. Members also affirmed their assessment that it was still possible to achieve the Board’s strategy of returning inflation to target in a reasonable timeframe without moving away significantly from full employment, even though this ‘narrow path’ was becoming narrower. With economic uncertainty heightened at present, members emphasised the importance of paying close attention to developments in the economic data.

In finalising the Board’s statement, members agreed that it was important to convey that the information received since the previous meeting had reinforced the need to be vigilant to upside risks to inflation, and that the extent of uncertainty at present meant it was difficult either to rule in or rule out future changes in the cash rate target. The Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. Returning inflation to target remains the Board’s highest priority and it will do what is necessary to achieve that outcome.

The decision

The Board decided to leave the cash rate target unchanged at 4.35 per cent, and the interest rate on Exchange Settlement balances unchanged at 4.25 per cent.