By James Glynn
SYDNEY–The Reserve Bank of Australia remains vigilant to the risk of a resurgence in inflation, warning in the minutes of its May 2 policy meeting that further increases to interest rates can’t be ruled out and the path to a soft landing for the economy was very narrow.
The RBA raised official interest rates for an 11th time at the policy meeting, surprising many in financial markets who had thought that evidence of a peak in inflation in late 2022 would allow more time for the central bank to pause to assess the impact of the increases announced over the past year.
“Members affirmed the board’s determination to what is required to bring inflation back to target, while emphasizing that it is still seeking to traverse the narrow path,” the minutes said.
“Members agreed that further increases in interest rates may still be required, but this would depend on how the economy and inflation evolve,” they said.
The minutes also contained warnings about the risks low productivity growth and sticky services inflation pose to the outlook for inflation.
If productivity growth, which has been flat for three year, did not improve, “growth in unit labor costs would be uncomfortably fast,” according to the minutes.
With inflation not forecast to return to the RBA’s 2% to 3% inflation target until by mid-2025, “it left little room for upside surprises to inflation given inflation would have been above the target for around four year by that time.”
While the RBA doesn’t target asset prices, it noted that recent weakness in the Australian dollar and a rise in house prices over recent months were factors in its decision to raise interest rates this month.
House prices have begun to climb again after a sustained period of weakness, with some economists linking the recovery to a sense in the community that the RBA might have finished raising interest rates.
“Although the board does not target asset prices, members agreed that movements in asset prices provide relevant information and need to be considered when assessing the outlook for activity and inflation,” the minutes said.
Consumer prices rose by 7.0% in the first quarter from a year earlier, which was down from the pace seen through 2022, but still, according to the minutes inflation remains “very high.”
“Members judged that the forecasts were still consistent with the economy remaining on the narrow path on which inflation comes down steadily and the unemployment rate increases but remains below pre-pandemic levels,” the minutes showed.
“Members also noted that there were significant uncertainties, and that history highlights the challenges of staying on such a path.”
Write to James Glynn at james.glynn@wsj.com; @JamesGlynnWSJ
This story originally appeared on Marketwatch
