Minutes of the Monetary Policy Meeting of the RBA (May)

The Reserve Bank of Australia has released the Minutes of the May 2011 Monetary Policy Meeting of the Reserve Bank Board today.


  • Members discussed the implications of recent developments in commodity prices for global inflation.
  • The inflation rate had been boosted by a large increase in fruit and vegetable prices
  • Conditions in the housing market remained subdued, with prices in most cities either flat or down over the past few months.
  • Higher interest rates  likely to be required in the future

International Economic Conditions

The global economy had continued to grow solidly in the early part of 2011, notwithstanding the effects of the Japanese earthquake. Growth in China and the rest of emerging Asia had remained strong, which was continuing to underpin high commodity prices. The rise in food and fuel prices over the past year was pushing up headline inflation rates globally, prompting a gradual tightening in monetary policy in a number of economies. The IMF was still forecasting above-trend growth for the global economy, albeit with significant differences between the rates of growth expected for the advanced and emerging economies.

Oil prices had increased further since the April meeting, with the price of Tapis crude rising to around US$130 per barrel. The prices of Australia’s bulk commodity exports had also risen, with annual benchmark contract prices for thermal coal exports settling at around US$130 per tonne, a little above what had been expected, and spot iron ore prices had also moved higher. In contrast, the prices of some food items had declined over the past month, as global supply concerns had eased, although prices remained high.

Members discussed the implications of recent developments in commodity prices for global inflation. While the depreciation of the US dollar was one factor behind the increases, prices had also risen significantly in terms of other currencies, largely reflecting strong growth in demand, especially from the emerging economies. Members noted that monetary policy remained accommodative in most countries, which was adding to pressure on commodity markets. In this environment, global inflation risks appeared to have moved to the upside. In some countries, higher commodity prices were also acting as a negative supply shock and reducing real incomes at a time when activity remained quite subdued.

Domestic Economic Conditions

The main economic news over the preceding month had been the release of the CPI, which increased by 1.6 per cent in the March quarter, with the year-ended rate of inflation rising to 3.3 per cent.

The March quarter outcome had been boosted by large price rises for a few items. There had been a 15 per cent increase in fruit and vegetable prices, a consequence of the extreme weather conditions earlier in the year. More recent data from wholesale markets suggested that the prices of some fruit and vegetables had already fallen back, although banana prices were expected to contribute further to inflation in the June quarter.

Fuel prices rose by nearly 9 per cent in the quarter, electricity prices increased by 5 per cent, and there were large seasonal increases in the prices of health and education services. Members noted that some further large increases in electricity prices were scheduled.

Partially offsetting the rises in these various items, the appreciation of the exchange rate had contributed to falls in the prices of many imported retail goods. The price indices for clothing and footwear, furniture, household appliances and audio-visual equipment had all fallen over the year to the March quarter.

Conditions in the housing market remained subdued, with prices in most cities either flat or down over the past few months. Auction clearance rates in Sydney and Melbourne had been at below-average levels in recent months. Members observed that growth in housing credit had slowed in recent months, while building approvals and home loan approvals had also softened in 2011. While this partly reflected the effect of the Queensland floods, conditions had softened in most other states as well in the wake of the increase in housing loan interest rates in November.

The moderation in inflation looked to have run its course. Given the March quarter outcome, the forecast for underlying inflation over 2011 had been lifted a little to around 3 per cent. For 2012, underlying inflation was expected to remain around that level, with the gradual pass-through of the exchange rate appreciation providing a partial offset to rising inflation pressures for non-traded items. By the end of the forecast period, underlying inflation was expected to be above 3 per cent. Headline inflation was forecast to remain above underlying inflation for the remainder of 2011, largely owing to higher fruit and vegetable prices. It was then expected to be below underlying inflation for much of 2012, as banana prices returned to more normal levels.

Considerations for Monetary Policy

Members noted that the data becoming available for Australia were being significantly affected by earlier floods and Cyclone Yasi. The inflation rate had been boosted by a large increase in fruit and vegetable prices, and it was quite likely that GDP would be shown as having contracted in the March quarter because of the disruption to production in the mining sector. As discussed at the previous meeting, members remained of the view that it was appropriate to look through the temporary effects on inflation and growth and to set policy based on the medium-term outlook.

Members viewed the current mildly restrictive stance of monetary policy as remaining appropriate, with recent rises in the exchange rate likely to have further tightened conditions, particularly in some sectors of the economy. Members noted that the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy. In this respect, members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target. Members agreed to continue to assess carefully the evolving outlook for growth and inflation at future meetings.

The Decision

The Board decided to leave the cash rate unchanged at 4.75 per cent.

Meeting Notes Source: RBA

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