The Reserve Bank of Australia (RBA) has raised the cash rate by a quarter of one percentage point this month, citing concerns that inflation is likely to persist. Minutes from February’s meeting reveal that a significant portion of inflation reflects underlying pressures that necessitate a policy response. The board also noted higher-than-expected capacity pressures.
The RBA’s decision was influenced by observations that financial conditions had eased considerably since mid-2023, with banks actively lending and credit experiencing robust growth. The board judged that maintaining the cash rate at 3.6 per cent would likely be insufficient to correct excess demand within the economy. Members acknowledged uncertainties surrounding the future trajectory of interest rates.
Several factors could contribute to more persistent inflation, including a continued pickup in demand growth, greater-than-anticipated supply constraints, rising long-term inflation expectations, or insufficient policy restrictiveness. The RBA aims to return inflation to its target range while preserving employment gains.
The board agreed that the decision to increase the cash rate aligns with this strategy, particularly given the material shift in the economic outlook and associated risks. The RBA is Australia’s central bank; it conducts monetary policy and oversees the financial system to promote economic prosperity and stability for all Australians.
