Garry Shilson-Josling, AAP Economist
(Australian Associated Press)
Concern that expectations of low inflation might become entrenched prompted the Reserve Bank’s decision to cut the cash rate.
The RBA cut the cash rate to a new record low of 1.75 per cent two weeks ago.
And it was inflation that tipped the balance, with a less frantic housing market clearing the way.
Signs of easing pressures in the housing market meant a cut would not be as risky as it might have been a year ago, the RBA said in the minutes of its May 3 board meeting, released on Tuesday.
“In coming to their policy decision, members noted that developments in recent months had not led to a material change in the outlook for economic activity or the unemployment rate, but the outlook for inflation had been revised lower.”
The RBA cited news of unexpectedly weak inflation, released ahead of the May 3 meeting, as the catalyst for the cut.
The central bank is worried that expectations of below-target inflation might become fixed in wage negotiations, locking in low inflation outcomes as smaller wage rises feed through into slower price rises.
The RBA’s business liaison program suggests businesses are still reluctant to offer annual wage rises of less than two per cent.
“But if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth,” the RBA said in the minutes.
The RBA’s minutes gave no explicit sign that the central bank is readying to cut again.
In fact, the crucial final paragraph reveals that board members discussed whether to cut or to wait for more information, suggesting another move in June is unlikely.
But the RBA’s revised forecast for inflation to hover around the lower end of its target range for the next two years means another cut is easily possible.
March quarter wages figures are due on Wednesday, and April employment data on Thursday.
And, as the unexpectedly soft consumer price index figures in late April showed, the RBA’s policy stance can be nimble and agile in response to surprises in the data.