RBA is losing tolerance on inflation


By Belinda Allen, Senior Economist at CBA:

Key Points:

  • The November Board Minutes reiterate the case to hike was to mitigate the risks of a slower return of inflation to target.
  • More resilient domestic demand, particularly investment has played a role in stronger output growth and inflation.
  • We expect the RBA has very little tolerance for further upside surprises to inflation.
  • Our base case sees the RBA on hold but upcoming CPI data will be crucial.

November Board Minutes reiterate the case to hike was driven by inflation, but also resilient domestic demand:

Last month, the Minutes were used as a vehicle to flag the risk the tightening cycle was not over. This proved correct with the RBA lifting the cash rate by 25bp in November, taking the cash rate to 4.35%.


The November Board Minutes instead were used to explain the reasoning behind the rate hike at the November Board Meeting. And as flagged at the post meeting statement and the November Statement on Monetary Policy, the main reason was to mitigate the risk that inflation would take longer to return to target.

While this is not a surprise given the stronger than expected Q3 23 inflation print, the Minutes delved deeper into the issue.

The Minutes noted “higher inflation reflected demand pressures in the economy being stronger than had been expected”. Not only had inflation data surprised to the upside and lifted the risks to the inflation outlook, but the resilience in domestic demand also contributed to the change in view, and the change was not just due to stronger than anticipated population growth.


The Minutes noted “the outlook for output growth had been revised up in the near term compared with the previous forecasts. This partly reflected stronger-than-expected population growth, which had been revised higher over successive prior quarters, and more strength in private and public investment than had previously been expected”.

As a result “the assessment of the staff was that higher inflation reflected demand pressures in the economy being stronger than had been expected”.

“Members also noted that the staff’s inflation forecasts would be for higher inflation if they had not been predicated on one or two rate rises.”


Gareth Aird had noted the expansion to domestic demand widens the scope of what the Board is monitoring. There has been recent focus on the public sector infrastructure pipeline and capacity constraints on the investment side of the Australian economy. The International Monetary Fund has also made this point

It will be worth watching upcoming mid-year Budget updates from both the Federal government and the various state governments.

Services inflation continues to be the main area of focus. The Minutes noted it would take subdued aggregate demand to resolve inflation, and not just the end of supply chain disruptions. “As a result, it was expected to take longer to return inflation to target than it had taken so far to reduce inflation from its peak.”

In contrast, the case to leave monetary policy on hold was driven by “inflation was continuing to decline in year-ended terms, the economy was slowing, and the geopolitical and economic outlook was highly uncertain”. As a result, a case could be made to wait for additional information.


The Minutes also made the point that the impact from population growth was making it harder to assess the underlying resilience of the economy.

In the end, the case to hike was the stronger one. “Members noted that the risk of not achieving the Board’s inflation target by the end of 2025 had increased and that it was appropriate that monetary policy should be adjusted to mitigate this”.

And a hike would reduce the “risk of inflation expectations increasing if the Board left the cash rate target unchanged at this meeting, particularly given the Board’s repeated statements that it has a low tolerance for inflation returning to target after 2025”.


But what is clear from recent communication is that the Board is likely to have very little tolerance for an upside surprise to Q4 23 CPI (due 31 January).

As Gareth Aird noted here, the RBA Board meeting in December is currently not ‘live’ based on the flow of data received since the November meeting, including last week’s wages and labour force.

Further, the early pulse of inflation data in Q4 23 to date also points towards no more hikes to the official cash rate.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.