The RBA Monetary Policy Board raised the cash rate to 4.35% today as widely anticipated, including by us. The Board vote was split 8-1.
Governor Bullock noted in the press conference that the Board now assesses the cash rate as being “a bit restrictive”.
The Bank’s baseline underlying inflation forecasts - which assume that the conflict is resolved soon and fuel prices decline - were increased for the coming year. Nonetheless, the Board assessed that “the risks remain tilted to the upside”.
That’s hawkish.
But the Board is clearly also appropriately worried about the risk of adverse growth effects from a period of prolonged uncertainty and disruptions to commodity flows.
The Bank provided two scenarios along these lines which show even higher inflation and unemployment rate outcomes and weaker growth (than baseline outcomes). Importantly, however, those scenarios revolve around higher fuel prices and assume that Australia continues to receive enough imported fuel products to meet domestic demand.
The Board’s statement noted that “[h]aving raised the cash rate three times, monetary policy is well placed to respond to developments”. Governor Bullock noted in the press conference that that Board feels that policy settings now allow it to better assess both downside and upside risks to the outlook.
One interpretation of these comments is that the Board may currently be leaning towards sitting on the sidelines in the near term to see how the Middle East situation and economic data evolve.
A pause at the next Board meeting on 16 June, however, would mean that the next opportunity to change policy settings is 11 August, more than three months away.
