The Reserve Bank of Australia lifted its cash rate in February after concluding that inflation pressure had become more persistent and broader than previously judged, and that financial conditions were not as tight as needed to return inflation to target, according to minutes released on Tuesday.
Board members debated the outlook in detail and flagged uncertainty about the economic trajectory. The minutes state the RBA did not have a "high degree of confidence in any particular path for the cash rate," reflecting the bank's view that the future course of policy remained unclear even as it acted.
Decision drivers
At its February meeting the board concluded underlying inflationary pressure had intensified beyond what could be attributed solely to temporary factors and that the rise in inflation had become much more broad-based across the economy. A central plank of the case for tightening was a reassessment of financial conditions - the board said it was no longer confident these conditions remained restrictive enough to bring inflation back to target.
That judgment was a key factor behind the decision to raise the cash rate by 25 basis points earlier in February. The move took the policy rate to 3.85% and represented the central bank's first increase in two years.
Members considered an alternative approach of pausing policy to gather additional evidence, reflecting uncertainty over whether the recent increase in inflation was mainly temporary or whether capacity pressures were materially weaker than previously assessed. After weighing these views, the board concluded there was a stronger case to tighten monetary policy.
Forecasts and market signals
During the meeting, the RBA substantially raised its inflation forecasts. The minutes record a projection for trimmed mean inflation to peak at 3.7% by mid-2026, then to decline to slightly below 3% by mid-2027, with a return near the midpoint of the target range only around mid-2028.
The bank also noted market-implied expectations for further rate increases, which suggested roughly 60 basis points of additional tightening by the end of the year.
Outlook and implications
While the board acted to tighten policy in February, the minutes underline significant uncertainty about the path ahead for both inflation and the economy. The RBA's updated forecasts and the market pricing of future hikes indicate officials see upside risks to inflation and have taken a more cautious stance on the need to restore price stability.
Given the bank's stated lack of high confidence in a single path for the cash rate, future meetings will likely continue to hinge on incoming data and how those data alter the balance of risks to inflation and employment.