Minutes of RBA’s May meeting revealed a detailed discussion where Board members weighed the pros and cons of keeping cash rate unchanged or increasing it by 25 basis points. Despite the fine balance of arguments, the Board saw it fit to raise the interest rates by 25bps to 3.85%, due to upside risks in inflation and tight labour market.
Data available in the month leading up to the meeting confirmed significant inflationary pressures and highlighted upside risks to the inflation outlook. The Board was concerned that if these risks materialised, it would “further delay the return of inflation to target levels” and potentially trigger a “damaging shift in inflation expectations”.
While acknowledging considerable uncertainties surrounding the economic outlook, particularly with respect to household consumption, the Board’s strong commitment to price stability and the necessity of anchoring inflation expectations tipped the scales in favour of a rate hike.
Looking forward, the Board indicated that “further increases in interest rates may still be required”, depending on the evolution of the economy and inflation.
