The Reserve Bank of Australia said that inflation was well above target even before the Middle East conflict, reflecting capacity pressures and temporary factors, and that the labor market was still assessed as slightly tight, according to the minutes of the May meeting released Tuesday.
Before deciding to raise interest rates by 25 basis points to 4.35% on May 5, the RBA noted that the conflict showed its impact through a material rise in March headline inflation due to higher fuel costs and expectations of a further rise in June, causing a sharp decline in consumer confidence.
The RBA's baseline forecast projected underlying inflation to remain above 3% until late 2027 and return to 2.5% only in mid-2028, higher than previously expected.
The case for a 25-basis-point rate increase centered on the inflation outlook, with staff assessing that capacity pressures remain tight and that financial conditions may not be sufficiently restrictive to return inflation sustainably to target if the cash rate were held unchanged.
The case for holding the cash rate unchanged focused on differing views over capacity pressures, the impact of a prolonged conflict on the board's objectives, whether long-term inflation expectations stayed anchored, and whether weaker demand would outweigh inflationary pressures.
Looking ahead to the RBA's June meeting, the board will assess recent data, with ANZ expecting headline inflation to have likely risen 0.5% month over month in April.
"But this shock has come against a backdrop of elevated capacity constraints and domestic cost pressures... our research suggests pass-through will be faster and more extensive, and the risk of inflation expectations drifting higher is elevated," said Assistant Governor Sarah Hunter in a Tuesday speech, discussing the impacts of the oil shock in Australia's economy.
ANZ anticipates interest rates to remain unchanged for a prolonged period.
