Stubbornly high inflation, a failure to revive productivity growth and a deeper consumption slowdown are all live possibilities keeping the Reserve Bank on guard.

Cutting interest rates was not discussed at the February cash rate meeting, with board members choosing between a 25 basis point hike or leaving interest rates unchanged at 4.35 per cent.

A slowdown in the inflation rate to 4.1 per cent annually through to December quarter from 5.4 per cent in the September quarter sparked hopes that the hiking cycle was done and cuts were around the corner.

RBA board members decided to keep interest rates on hold, as widely expected, although the refusal to rule out more hikes was phrased more firmly than many anticipated.

In the minutes from the two-day meeting at the start of the month, the board made it clear inflation had not been conquered.

“Members noted that there had been further progress towards the board’s objectives but that more progress was required and the outlook remained uncertain,” the statement read.

Inflation that proves more persistent than anticipated, consumption that weakens more markedly than staff’s central forecasts, and productivity growth that does not recover as assumed were the “most material risks” to its inflation-fighting plan.

Weak productivity growth has been contributing to sharp increases in labour costs per unit of output.

In recent communications, Reserve Bank officials have chalked up the nation’s weak productivity performance over the past few years to disruptions from the pandemic and the business cycle.

However the minutes suggested it was too early to tell if productivity growth would recover.

“Members acknowledged that it is too soon to determine the extent to which a fading of the lingering disruptions from the pandemic and the adoption of artificial intelligence would support a turnaround in productivity growth.”

There is also a risk that consumer spending weakens by more than expected, leading to slower growth and a softer jobs market.

“As inflation moderates and real incomes start to rise from 2024, consumption growth was expected to recover gradually to its pre-pandemic average over 2025,” the minutes said.

“Members considered the risk that consumers might not increase spending as real incomes begin to rise again; this could occur if the effect of the previous fall in real wages outweighs the support from the large stock of additional savings built up in 2020 and 2021 as well as the rise in housing wealth over the previous year.”

They said the consumer remained a source of uncertainty, with risks to both the upside and downside.

Poppy Johnston
(Australian Associated Press)