(Bloomberg) -- Australia’s central bank will hold interest rates at the current 12-year high until it’s confident that inflation is moving sustainably toward target, minutes of the last board meeting showed, suggesting policy easing still remains some way off.
The Reserve Bank’s board discussed scenarios in which future policy needed to be held at restrictive levels for a prolonged period or tightened further, minutes of the Sept. 23-24 meeting released Tuesday showed. It also reviewed scenarios where an easing might be required. The board concluded that each outcome was conceivable given the uncertain economic outlook and opted to stand pat at 4.35%.
“Members agreed that it was important to convey that the board remained vigilant to upside risks to inflation,” the minutes showed. Members also “affirmed that monetary policy would need to be sufficiently restrictive until members were confident that inflation was moving sustainably towards the target range.”
The minutes shine a spotlight on the board’s policy conundrum at a time when Australia’s inflation remains elevated and sticky while the rest of the world is slowly embarking on an easing cycle. Last month, Federal Reserve Chair Jerome Powell led his colleagues to an outsized rate cut designed to preserve the strength of the US economy.
RBA board members discussed the global easing at their meeting but concluded that Australian rates didn’t need to move in lock-step with other economies given inflation and the labor market are both stronger at home and monetary policy is less restrictive, the minutes showed.
Some economists described the minutes as tilting “dovish” after the RBA omitted a line that “it was unlikely that the cash rate target would be reduced in the short term” from its latest communication.
“We view this change as significant,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “The board has now back‑pedaled from its forward guidance.”
On Tuesday afternoon, RBA Deputy Governor Andrew Hauser was asked at an event in Sydney whether the minutes were indeed dovish. Hauser said that the central bank was only trying to zoom in on potential risks that could affect policy making.
“I don’t know whether ‘we remain vigilant to upside risks to inflation’ is being a particularly dovish message,” Hauser said. “Since the last meeting, the board’s view was that there wasn’t actually very much news in the data so we’ll continue to describe how we see the economy, we’ll continue to describe how we expect we might react to that outlook.”
Underlining the mixed economic outcomes lately, private reports on Tuesday showed Australia’s consumer sentiment climbed to a 2-1/2 year high in October, while remaining deep in pessimistic territory, and business conditions rose. A gauge of job advertisements also increased, suggesting the country’s labor market remains healthy.
The RBA highlighted in the minutes that underlying inflation – the measure it’s tracking given government rebates will pull down the headline figure – is “still too high” and had fallen “very little” in quarterly terms over the preceding year.
“Returning inflation to target remains the board’s highest priority and it will do what is necessary to achieve that outcome,” the minutes showed. Hauser reiterated that point in his responses to journalists’ questions on Tuesday, saying the job of lowering inflation is not done yet.
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Financial market pricing implies the RBA’s next move is down, with a cut seen early next year. A Bloomberg News survey showed that a majority of economists expect the RBA will keep the cash rate steady this year.
The RBA board also discussed a review of its cheap lending program for banks that was introduced during the coronavirus pandemic as part of a suite of unconventional policy tools.
The review concluded that the Term Funding Facility had met its policy goals. These were to reinforce the benefits of a lower cash rate by reducing the funding costs of banks and in-turn interest paid by borrowers, as well as to encourage banks to support businesses during a tough period.
The RBA will publish its full review on Wednesday which will be accompanied by a speech by Assistant Governor Christopher Kent.
(Adds comment from RBA Deputy Governor Andrew Hauser, economist.)
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