Minutes of the Monetary Policy Meeting of the Reserve Bank Board

Highlights:

• Output Growth in Advanced Economies: Recent data signals a bottoming out of output growth, with upward revisions for 2024 following stronger-than-expected March quarter results. However, restrictive monetary policies continue to dampen demand.
• Inflation Trends: Most economies face inflation above central bank targets, driven by robust services price inflation. Exceptions like Canada and Sweden show moderating trends due to negative output gaps.
• Chinese Economic Outlook: Despite slight softening post-strong growth, China maintains a stable outlook for 2024, buoyed by robust external demand amidst escalating trade tensions with the US and EU.

Output Growth in Advanced Economies

Recent data indicated that output growth in advanced economies had bottomed out, with some regions seeing potential upside risks materializing. Forecasters have revised growth expectations for 2024, reflecting stronger-than-expected data in the March quarter. Despite this, restrictive monetary policy continues to weigh on demand, and labor markets are easing, albeit still tight.

Inflation Trends

Inflation remains above central bank targets in most economies, with services price inflation stronger than anticipated since the start of the year. However, in economies like Canada and Sweden, where output gaps are negative, services price inflation is moderating.

Chinese Economic Outlook

Chinese economic indicators softened slightly post the strong March quarter growth, but the outlook for 2024 remains unchanged. China's external demand is robust, supported by recovering advanced economies. New US and EU tariffs on Chinese imports highlight the increasing risk of broader trade tensions.

Policy Implications

The information presented suggests a cautious approach to monetary policy is warranted. While output growth shows signs of stabilization, inflationary pressures, particularly in the services sector, pose ongoing challenges. The easing of labor markets, while still tight, offers some relief but does not eliminate concerns over wage-driven inflation. In China, despite a slight softening, the stable outlook and robust external demand indicate resilience against potential trade disruptions. The Board will closely monitor these developments to adjust policy as needed, ensuring economic stability and alignment with inflation targets.

Considerations for Monetary Policy

Members noted recent data indicating global growth had troughed in late 2023 and was rebounding, while disinflation had slowed in several countries. In Australia, higher-than-expected inflation in April and revised historical consumption estimates suggested more resilience in consumer spending than previously assessed.

GDP growth in Australia for the March quarter was weaker than expected, and evidence suggested peak wages growth occurred in late 2023. Despite restrictive financial conditions, business debt growth exceeded post-global financial crisis averages, and equity risk premiums remained low.

Some central banks globally shifted to less restrictive policies, while others awaited sustained evidence of inflation returning to targets before adjusting rates.

Policy Decision Factors

The possibility of raising the cash rate was considered if current policies were deemed insufficient to meet inflation targets within a reasonable timeframe, especially given slower-than-assumed inflation return or insufficient closing of aggregate demand-supply gaps.

Factors like stronger-than-expected global demand, recent easing of financial conditions for businesses, and prolonged inflationary pressures indicated potential limits to current policy effectiveness.

Conversely, holding the cash rate steady was favored to support an economic path consistent with returning inflation to target by 2026, while mitigating risks to employment gains. Concerns over interpreting recent consumption revisions and uncertainties in assessing real-time spare capacity cautioned against premature policy adjustments.

These considerations underscored the Board's decision to maintain the cash rate at 4.35 per cent, emphasizing a vigilant stance towards inflation risks amidst evolving economic uncertainties.

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