Australia's Central Bank Remains Jittery About Inflation Risks, Global Uncertainty

By James Glynn

SYDNEY--The Reserve Bank of Australia remains jittery about the risks of higher inflation and will have little tolerance for any data that point to further delays in taming price pressures, according to the minutes of its latest policy meeting.

"Given the already lengthy period in which inflation had been above (2% to 3%) target, the board will have minimal tolerance to accommodate a more prolonged period of high inflation, even if this occurred because of factors that constrained the economy's supply capacity," minutes of the meeting held on Nov. 4-5 said.

The RBA left the official cash rate at 4.35% at the meeting, completing a full year since policy settings were last changed.

Economists remain confident that the RBA will start to cut interest rates in the first half of next year, but money markets are far less optimistic, with recent swap market pricing suggesting the RBA could be delayed until August.

To be sure, the minutes suggested the RBA is in no rush to cut the OCR, given numerous warnings about stubborn inflation pressures and a comment that the board will need to see more than one good quarterly inflation outcome to be confident that a fall in inflation was sustainable.

Inflation remained above the target band in the third quarter, with policymakers concerned that core inflation readings remain stubbornly high, while price pressures in the services sector of the economy remain sticky.

"Members observed that underlying inflation...remained too high and that staff forecasts did not see inflation returning to target until 2026," the minutes said.

The RBA said it isn't ruling anything in or out in terms of policy decisions, implying that under the right conditions, an interest rate increase might still be needed.

The minutes showed the policy-setting board explored several scenarios that might see it raise or lower the OCR.

The RBA was among the last of the major central banks to start raising interest rates following the global spike in inflation at the end of the Covid-19 pandemic, while also not tightening as far as its peers over ensuing years.

​Global events might yet determine the outlook for interest rates. The minutes cited a number of growing international risks including uncertainty about the policy direction of the Trump White House, the size and composition of stimulus to support China's economy, and the potential for unsustainable growth in global government debt.

"It was not yet possible to factor in events such as these, given pertinent details were unknown and still largely unpredictable," the minutes said.

Write to James Glynn at james.glynn@wsj.com