“Members noted it was possible that firms’ price-setting behaviours were undergoing a change from the pre-pandemic period, with businesses becoming more confident raising prices would not significantly reduce demand or erode their competitive position,” the minutes said.
Members observed it would be “more difficult” to return inflation to the target if the “psychology in Australia were to shift in an enduring way”.
After previously indicating they wanted to see this week’s wages data, board members said the evidence of widespread wage pressure from the RBA’s business liaison program and prominent business surveys was clear, and when combined with the CPI result, the conditions for a rise had been met.
They also agreed “further increases in interest rates would likely be required to ensure that inflation in Australia returns to the target over time” but it would be necessary to “monitor” how rising rates affected highly indebted households to determine the timing of future rate increases.
“In making its decisions, the Board agreed that it will continue to be guided by the evidence on both inflation and the labour market, while noting that significant uncertainties remain,” the minutes said.
In its Statement of Monetary Policy following the meeting, the RBA upgraded its forecast for CPI inflation to hit 5.9 per cent this year, before moderating to 3.1 per cent by the end of 2023.
It also now expects underlying inflation – its preferred measure – to spike to 4.6 per cent later this year, well above the 2-3 per cent target band.
“The underlying drivers of inflation were anticipated to evolve over the forecast period, with the effects of global supply side disruptions and dwelling cost inflation easing while domestic labour costs picked up.”
The market consensus is for annual wages growth of 2.5 per cent in the year to March 31, and 0.8 per cent over the March quarter, but the RBA noted this measure did not capture all of the elements of labour costs.
“Average earnings were expected to increase at a faster pace than the [Wage Price Index], as firms turned to bonuses, allowances and other measures to attract and retain workers,” the minutes said.
“Given the tight labour market and increase in job mobility, more firms were having to pay higher wages to attract and retain staff, and labour costs were picking up at a faster rate than over the preceding year.”