Minutes of the Monetary Policy Meeting of the Reserve Bank Board

Sydney – 9 and 10 December 2024

Members participating

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor), Ian Harper AO, Carolyn Hewson AO, Steven Kennedy PSM, Iain Ross AO, Elana Rubin AM, Carol Schwartz AO, Alison Watkins AM

Others participating

Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), David Jacobs (Head, Domestic Markets Department)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (Chief Communications Officer), Michael Plumb (Head, Economic Analysis Department)

Keith Drayton (Chief Risk Officer) for the item on the future system for monetary policy implementation, Christopher Thompson (Deputy Head, Payments Policy Department) for the item on the future of money and payments

Financial conditions

The Board began its discussions by noting that central banks in most advanced economies had cut policy rates over prior months as inflationary pressures had eased, and many had signalled further cuts. Despite this, monetary policy remained more restrictive in most peer economies than in Australia. Compared with views at the time of the previous meeting, market participants expected a slightly slower pace of rate cuts in the United States but a somewhat faster pace of cuts in the euro area. The central banks that had cut rates most aggressively – such as those in Canada, Sweden and New Zealand – were responding to particularly weak economic conditions, which included significant increases in unemployment rates.

Financial markets had at the time of the meeting generally responded quite modestly to the results of the US presidential election. Government bond yields had risen in the months preceding the election, consistent with an expectation of somewhat higher inflation and government debt issuance irrespective of the outcome, but yields had subsequently declined. While the level of government debt for Australia was lower than for peer economies, domestic yields had been heavily influenced by global market conditions and had moved similarly. Since the election, equity prices had risen in the United States and most other advanced economies, including Australia. More generally, equity risk premia were at historically low levels in many markets, also including Australia. Members discussed potential explanations for the low equity risk premia, at a time when economic and policy uncertainty appeared high. In doing so, they noted the common trends in risk premia between the United States and Australia despite considerable differences in the composition of their equity markets. Members also considered the potential economic implications if equity risk premia proved to be unsustainably low. They noted that, to date, firms had not accelerated their pace of equity raising in public financial markets.

The Australian dollar had depreciated against the US dollar and, to a lesser extent, against a broader basket of currencies on a trade-weighted basis since the previous meeting. In part, these moves reflected broad-based strength in the US dollar, though market participants had reported that they also reflect concerns about the outlook for the Chinese economy. These concerns had emerged despite Chinese authorities shifting to a more accommodative economic policy stance (of which full details had yet to be revealed).

The staff continued to assess financial conditions in Australia as restrictive overall. Interest rates on bank lending were above their average since 2009, as were household debt repayments as a share of income. That said, conditions were not as tight as implied by the level of interest rates alone. The supply of finance had held up well overall, reflected in spreads to risk-free rates across swap, bond and bank lending markets that were below historical averages, and supported by still relatively low levels of loan arrears. Consistent with that, overall credit growth had picked up over the prior year. Within that, housing credit growth had increased to around its longer run average, which was somewhat unusual given developments in the cash rate over preceding years. Members noted the available evidence that the ability of households to borrow had been constrained by the tightening in monetary policy since 2022 and that the strength in housing credit growth might be partly explained by factors such as strong growth in the population and nominal income. Meanwhile, growth in credit to businesses had been above average, alongside resilient company earnings, which also provided an ongoing source of funding for business investment.

Market expectations for the cash rate were a little lower than at the time of the previous meeting, after having risen noticeably over preceding months. Market participants expected a modest amount of easing in the cash rate to begin in the first half of 2025. The timing of this had been brought forward a little, following weaker-than-expected September quarter national accounts data.

International economic conditions

Members discussed the high level of uncertainty around the global economic outlook. Members were briefed on the various channels through which possible changes in US trade, fiscal, regulatory and immigration policies following the US election could affect growth and inflation globally and in Australia. While the policy direction of the new administration was becoming clearer, it was not yet possible to determine the net impact on the Australian economy without knowing details of the scale and nature of the policies to be implemented and how other economies would respond. Members also noted the relatively subdued level of economic activity in China (notwithstanding some recent strengthening) and the pronounced level of geopolitical uncertainty more generally.

Members noted that inflation had continued to ease globally but that the extent and composition of disinflation had varied across economies. In particular, services price inflation was still proving persistent in several economies – a point that some central banks had noted might have implications for the speed at which they removed policy restrictiveness.

Domestic economic conditions

Turning to the domestic economy, members noted that output growth had been weak over the year to the September quarter, at 0.8 per cent. Quarterly growth had picked up modestly but by slightly less than had been expected in November. In addition, revisions to earlier data had raised the estimated level of output over prior years but had also implied slightly less momentum in growth than previously assessed. Growth in public demand had again accounted for most of the growth in GDP in the quarter, while there had been larger-than-expected subtractions from some of the more volatile components of GDP. Growth in both household income and consumption had recovered, but by a little less than had been expected (considering cost-of-living relief). More recent information pointed to a further pick-up in consumption in October and November, but it was too soon to judge whether this reflected a persistent pick-up or temporary pre-Christmas spending activity. Members noted that future trends in consumption spending would have important implications for the pace of GDP growth and the labour market.

Members noted the staff’s assessment that there was still excess demand in the Australian economy. This judgement was, however, becoming less clear as the estimated gap between aggregate supply and aggregate demand narrows. Measures of capacity utilisation from business surveys supported the assessment that there was still excess demand in the economy overall. On the other hand, members observed that trends in wages growth could be a signal that there was more capacity in the labour market than had been assumed.

Labour market conditions had eased only gradually over the prior year and the earlier easing in some indicators had stalled. The unemployment rate remained at 4.1 per cent in October and had been broadly steady for some time, while the underemployment rate had declined a little since May. The employment-to-population ratio was well above historical norms, despite strong population growth, and was holding up significantly better than in many other economies.

Members noted that employment growth had been driven by the non-market sector over preceding quarters. By contrast, growth in employment in the market sector had remained subdued, and survey and liaison measures of employment intentions – which mainly capture the market sector – had eased further. Members considered the implications of the differing pace of job creation in the market and non-market sectors. They agreed that the composition of growth in employment was not central for economic welfare or assessments of full employment. However, members noted the risk that growth in overall employment could stall if growth in the non-market sector were to slow more markedly than currently anticipated. The implications of this would depend on the extent to which prevailing trends in market sector employment reflected difficulties attracting workers when non-market sector demand was strong, or weak aggregate demand.

Members discussed the latest information on wages growth. The Wage Price Index (WPI) had increased by 3.5 per cent over the year to the September quarter, down from 4.1 per cent in the preceding quarter. The step-down in growth was most pronounced for those whose wages were set by awards and enterprise bargaining agreements, reflecting the smaller increases in award wages this year and the absence of one-off administered wage increases. Growth in public sector wages had been slightly softer than expected in November, though there had been some volatility in preceding quarters; wages growth in individual agreements had been in line with expectations. Growth in nominal unit labour costs from the national accounts – a broader measure of labour costs than the WPI, which adjusts for labour productivity – had also eased further.

Given the importance of productivity growth for sustainable wages growth and future living standards, members were briefed on the currently available information. Average labour productivity growth from 2017/18 to 2023/24 had been slow, at only 0.2 per cent per annum. Only a small part of the shortfall between this slow pace of growth in aggregate productivity and its historical average reflected the rising share of labour in the non-market sector. Productivity growth in the market sector had also been around a percentage point below long-run average rates and, at a more disaggregated level, there was a broad-based pattern of productivity growth in Australian industries having been below rates recorded by comparable industries in the United States (which had been experiencing stronger growth in productivity than elsewhere). While members noted that slow productivity growth over preceding years could be attributed to various temporary factors, it may also have been a continuation of the factors that had constrained productivity growth prior to the COVID-19 pandemic. Members discussed the implications for inflation of persistently weak productivity growth. They noted that these would depend on whether aggregate demand and wages growth also slowed commensurately, thereby limiting inflationary pressures, or not.

Inflation measured by the monthly CPI indicator had been unchanged at 2.1 per cent over the year to October. Members noted that the headline outcome continued to be reduced by the roll-out of electricity rebates and that the October data contained limited information about services price inflation. Inflation for rents and new dwelling costs had been slightly weaker than expected, pointing to modest downside risk to the staff’s expectation for inflation in the December quarter. Members also discussed the modest easing in inflation indicators from business surveys and liaison. However, official measures of underlying inflation were around 3½ per cent, which was still some way from the 2.5 per cent midpoint of the inflation target.

Considerations for monetary policy

Turning to considerations for the monetary policy decision, members noted that much of the data received since the previous meeting had been broadly in line with the forecasts published in November; where differences had occurred, outcomes had, on balance, been somewhat softer. Taken together, these data had not been sufficient materially to alter the staff’s central outlook for the economy, though they had shifted the risks surrounding the outlook.

Underlying inflation was still too high, underpinned by persistently high services price inflation. The staff’s most recent forecasts did not see inflation returning sustainably to the midpoint of the target until 2026. While recent information on inflation in housing services had been a little softer than expected, on its own this did not materially change the medium-term outlook for inflation.

The information received since the previous meeting confirmed that wages growth had slowed and that this had occurred faster than expected. At the same time, recent productivity outcomes had remained weak. A number of indicators of labour market conditions had strengthened or stabilised over preceding months. However, employment growth in the market sector had been weak and hiring intentions in the private sector were below average.

Growth in GDP had continued to be subdued in the September quarter and had been a little softer than expected. Revisions to historical data had resulted in the level of economic activity being higher than previously assumed but the momentum in growth somewhat weaker. Household consumption had picked up somewhat in the September quarter and early indications were that consumer spending had risen further in October and November. However, the extent to which this reflected a sustained recovery in consumer demand, rather than a pull-forward in expenditure in response to emerging patterns of promotional activity, was not clear.

Members judged that financial conditions remained restrictive. However, lower-than-typical spreads, including on corporate bonds and bank lending, as well as a very low equity risk premium, suggested that financial conditions were less restrictive than implied by the cash rate alone. Members acknowledged that this observation could have implications for the appropriate stance of monetary policy.

After careful consideration of these factors, members agreed that it was appropriate to leave the cash rate target unchanged at this meeting. They noted that the data received since the previous meeting had not been sufficient to shift the central forecast for inflation or the labour market materially at this stage. Members judged that economic developments remained consistent with the Board’s strategy of returning inflation to target within a reasonable timeframe while preserving as many of the gains in employment as possible. They also observed that important additional information on the labour market, inflation and expenditure, along with a revised set of staff forecasts, would be available by the time of the February 2025 meeting.

Turning to considerations for future decisions on the stance of monetary policy, members observed that the annual review of forecasts discussed at the previous meeting had shown underlying inflation and the unemployment rate evolving largely as expected in the November 2023 Statement on Monetary Policy. Members also observed that this had supported their confidence that inflation would sustainably return to target within the timeframe indicated by the staff’s central forecasts.

Relative to this central path, members judged that the risk that inflation returns to target more slowly than forecast had diminished since the previous meeting and that the downside risks to activity had strengthened. A consideration underpinning this judgement was reduced momentum in GDP growth over the year to the September quarter. Members noted that consumption growth had been weaker than expected over this period and that it was not clear whether the apparent strengthening in consumer spending in October and November would be sustained. Given the weakness in private demand and the slow pace of job creation in the market sector, members were alert to the risk that the unemployment rate could increase by more than expected if labour demand in the non-market sector were to slow abruptly.

A second consideration was developments in wages growth, which had slowed by more than expected. Members discussed whether this could signal that potential labour supply was more abundant than had been assumed. They noted that it was possible for wages growth to slow even when employment was above its full employment level, so long as the labour market was moving towards better balance and inflation expectations remained anchored. They also discussed the possibility that the slowing was in response to earlier weakness in productivity growth, noting that growth in unit labour costs had also declined from its previously rapid rate.

While members judged the upside risks to inflation to have diminished, they discussed several factors that meant it was too soon to conclude with full confidence that inflation was moving sustainably towards target.

First, some of the data had indicated resilience in economic activity. A variety of labour market indicators could be signalling that progress in the labour market moving closer to its full employment level had stalled. Early indications from the ‘Black Friday’ sales also pointed to strength in consumer demand during that period. Services price inflation globally had been more persistent than expected and this could also prove to be the case in Australia. And members noted that various risks to the global economic outlook could, in some scenarios, limit the pace of further disinflation.

Second, members noted uncertainties over the level of policy restrictiveness. A number of measures of financial conditions had loosened somewhat over prior months and there were indications that financial conditions were not restraining credit growth as much as had been expected. More generally, members observed that the cash rate was still below or comparable to the level of policy rates in several other economies, even as central banks in those economies had been lowering their policy rates. Despite the reductions abroad, the combination of market pricing and central banks’ estimates of neutral interest rates implied that monetary policy might be more contractionary in several economies than in Australia and remain so into 2025.

In weighing up the potential implications of these observations for future decisions on the stance of monetary policy, members reiterated their earlier view that they had minimal tolerance to accommodate a more prolonged period of high inflation than currently envisaged. At the same time, if the future flow of data continued to evolve in line with, or weaker than, their expectations, it would further increase their confidence that inflation was declining sustainably towards target. If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness. If the data came in stronger, that process could take longer. They noted that, in making this decision, they would be guided by how the evolving data shaped the economic outlook and the associated risks.

In finalising the Board’s statement, members affirmed that monetary policy would need to be sufficiently restrictive until members are confident that inflation is moving sustainably towards target. They agreed that they had gained confidence about this since the previous meeting but risks remained. Members emphasised the need to be guided by the incoming data and evolving assessment of risks when making future decisions. Returning inflation to target remains the Board’s highest priority and it will do what is necessary to achieve that outcome.

The decision

The Board decided to leave the cash rate target unchanged at 4.35 per cent, and the interest rate on Exchange Settlement balances unchanged at 4.25 per cent.

Future system for monetary policy implementation

Members discussed the design of an ample reserves system with full allotment for implementing monetary policy, following an initial discussion in November. These discussions followed the Board’s decision earlier in the year to endorse a new operational framework for implementing monetary policy. In this system, banks’ demands for reserves would be satisfied via open market repo operations, at a price near the cash rate target in ‘full allotment repurchase (repo) auctions’.

The staff had engaged with stakeholders via a public consultation and had undertaken detailed work to estimate the extent of demand for reserves and the potential operation of the system. The supply of reserves had declined significantly with the maturity of the Term Funding Facility and would continue to decline gradually as the RBA’s bond holdings matured. At some stage the supply of reserves in the banking system would approach the level of underlying demand.

Members agreed that the Board’s objective for the monetary policy implementation framework was to achieve ‘monetary control’. This would involve the cash rate trading close enough to the target to convey a clear and consistent stance of monetary policy and to help anchor other short-term interest rates at levels broadly consistent with the cash rate.

The Board agreed that effective monetary control could be achieved with modest deviations of the cash rate from the target. This would enable and encourage banks to use private financial markets to trade reserves and avoid the RBA having an overly large presence in markets. Well-functioning private financial markets provide resilient and diverse funding sources to banks and are therefore important for financial stability. In addition, this approach would allow the RBA to keep its financial and operational risk no larger than necessary to achieve the objectives of monetary control and encourage private market activity.

In considering the appropriate degree of monetary control, members were informed of how the RBA could implement the ample reserves system to achieve its objectives. This included settings for administered rates and other terms of the RBA’s market operations, along with a variety of means to supply reserves (including foreign exchange swaps, cross-currency swaps and purchases of short-dated government bonds).

Members emphasised that decisions related to the implementation of the ample reserves system were operational and had no implications for the stance of monetary policy or the Board’s approach to bond holdings acquired during the COVID-19 pandemic.

The RBA would continue monitoring how conditions in markets evolved as the quantity of reserves declined and adjust operational parameters over time within the bounds of the agreed approach. Members agreed that further details of the new framework should be publicised in due course, including via a speech by the Assistant Governor, Financial Markets in early 2025.

The future of money and payments

Members discussed a paper on the RBA’s research on a central bank digital currency (CBDC), including the forward work agenda. They noted the staff’s current assessment that a public interest case to issue a retail CBDC in Australia had yet to emerge. Australians are generally well served by a retail payments system that is safe and efficient and where there had been significant innovation over preceding decades. Moreover, while the use of physical cash for payments has been declining, the RBA and the Australian Government remain committed to ensuring that cash remains readily available for Australians who value using it.

Members noted that there was greater scope to explore the advantages and disadvantages of a so-called wholesale CBDC, which could offer functionality that goes beyond the RBA’s existing arrangements for providing Exchange Settlement Accounts to financial institutions. A key focus of current research at the RBA is on opportunities for a wholesale CBDC and associated infrastructure to support settlement in tokenised asset markets and enhance cross-border payments. The RBA had recently commenced a collaborative research project with industry – Project Acacia – to better understand how innovations in digital money could support tokenised asset settlement. The project is expected to be completed around the end of 2025.

Members discussed some of the important policy challenges that issuance of some form of CBDC could pose, depending on its design and use. These include potential effects on the setting and implementation of monetary policy and on the RBA’s balance sheet. Financial stability risks could also arise if a CBDC amplified bank runs in times of stress. These matters will require further research and engagement with the Monetary Policy Board in due course, if the case for a CBDC – wholesale or otherwise – becomes more compelling.