RBA: Risk increased that inflation will not reach target within a reasonable timeframe — Capital Brief

The news: According to the minutes of the Reserve Bank of Australia (RBA) monetary policy meeting, the risk that inflation will not return to target within a reasonable period of time has increased.

The context: The RBA cited the fact that underlying inflation had fallen very little year-on-year and GDP growth had remained weak on a quarterly basis as reasons for the extended timeframe. It also cited the easing in the labour market and the prevailing volatility in financial markets.

The minutes said RBA members agreed that monetary policy would need to be more restrictive than suggested in order to bring inflation back to target within a reasonable timeframe.

The central bank said it had decided against raising the key interest rate because the increase in yields was not significant within the time frame for achieving the target and the volatility of financial markets had not had a significant impact.

The RBA said keeping interest rates at current levels for longer than market prices currently imply may be enough to bring inflation back to target within a reasonable timeframe, noting that the board would reassess this at future meetings.

The RBA said it was “unlikely” that the key interest rate would be cut in the short term.

What they said: “… members decided that the arguments for leaving the key interest rate unchanged at this meeting were stronger,” the minutes say.

“They agreed that this was the best way to balance risks to inflation and the labour market, particularly in light of prevailing uncertainties, market volatility and market expectations.”

“Members noted that it would be appropriate to continue to give somewhat more weight than usual to data flows relative to forecasts when there are uncertainties about the persistence of supply shocks.”