RBA hints another rate rise could be on the cards

The Reserve Bank of Australia (RBA) board has confirmed it discussed both leaving interest rates unchanged and a hike at its May meeting.

The board minutes were in line with messaging from RBA governor Michele Bullock, who spoke at a press conference after the decision was ultimately made to keep rates unchanged.

Bullock noted that the board has considered a hike, but that there was a stronger case for keeping interest rates on hold.

"The resumption of rate hike discussions in May follows the removal of that deliberation at the March board meeting," Commonwealth Bank senior economist Belinda Allen said.

"Stronger economic data, including the Q1 24 CPI print, caused the rate hike discussion. Although the minutes noted the stronger data was all non-consumer related with consumer spending data signalling ongoing weakness."

The RBA minutes said while some believed inflation would come down, it was too early to say it would be a given without waiting for more data.

"Judgements underpinning the staff forecasts risked being overly optimistic about the forces that would drive down inflation, leaving the balance of risks tilted to the upside...... the forecasts had also placed significant weight on the downside risks to consumption," the RBA minutes said.

Allen said the Statement on Monetary Policy noted that a judgement had been used to lower household consumption compared to what the models suggested, based on household disposable income forecasts.

"Currently households are choosing to save, rather than spend, with the opportunity cost of not saving currently elevated due to high interest rates," Allen said.

"We agree that the consumer is a risk to the policy outlook, particularly in context of the circuit breakers arriving 1 July 2024 in the form of income tax cuts, energy rebates and other measures."

The minutes also pointed to slow productivity growth, inflation expectations and further growth in public demand and business investment.

"Recent government policies announced after the May board meeting to mechanically lower headline CPI should contribute to anchoring inflation expectations," Allen said.

"Also helping will be evidence of the peak in wages growth now being behind us. One key risk though remains a strong pipeline of investment work by both the private and public sector."

Allen said CBA remains "comfortable" with its base case that the RBA will start easing interest rates gradually in November this year.