MNI RBA WATCH: Timing Drove Split Vote, Not Direction-Bullock

The five-to-four vote by the Reserve Bank of Australia Board to lift the cash rate 25 basis points to 4.1% on Tuesday reflected differences over timing rather than the direction of policy, Governor Michele Bullock told reporters, noting rates will need to go higher should inflation prove persistent. 

All members agreed inflation remains too high, excess demand persists, and inflation expectations must stay anchored, Bullock said, adding that those who voted to hold did so from a “hawkish” perspective, expecting further tightening to be needed.

Dissenting members favoured awaiting greater clarity on the Middle East conflict and its potential impact on global and domestic growth, as well as additional confirmation from labour market and inflation data. “The issue wasn’t the direction, it was really the timing,” Bullock said, following the largely-expected call. (See MNI RBA WATCH: Board To Consider Hike Ahead Of Oil Shock) 

Market pricing firmed following the decision, with overnight index swaps now fully pricing a further 25bp hike in May and implying a 4.5% peak cash rate by September, above the 4.35% high reached in 2024. 

Bullock said global uncertainty remains elevated but inflation expectations are still anchored, removing the need to consider a larger 50bp move. The bank’s strategy remains to return inflation to target while preserving labour market gains, she noted. 

RECESSION RISK

Bullock did not rule out the risk that tighter policy or an escalation in the Middle East could push the economy into recession, though she stressed this is not the bank’s baseline.

The Board aims to reduce the positive output gap and bring inflation down without a sharp rise in unemployment, she said, but acknowledged that if inflation proves persistent, policy may need to tighten further even at the cost of weaker growth. "We don't want to have a recession. But if it's hard to get inflation down, then we're going to have to deal with that possibly," she added.

Bullock said the labour market is stronger than previously assessed, with risks now tilted more towards inflation than employment, reinforcing the case for maintaining a tightening bias. The Board will closely monitor global developments and stands ready to adjust policy should conditions deteriorate materially, she added, noting the Bank aimed to bring the output gap to zero. 

"Some people say you actually need to create a negative output gap ... That's not our strategy. Our strategy continues to be to try and bring the output gap down from the positive and with anchored inflation expectations, which will only stay anchored if people think we will do what we need to do to get inflation down." 

BOARD DYNAMICS

Bullock said the split vote reflected healthy debate, and that the Board’s globally unique structure — with a majority of external members — can lead to differing but reasonable judgements in an uncertain environment.

Such diversity of views is constructive, particularly given the challenges of calibrating policy amid elevated uncertainty, she said.

"Particularly in circumstances like this, where you know it's very difficult, it's uncertain, there are two very good arguments to do two different things, then reasonable people can differ and that's a positive thing. The meeting today with its split decision and the process it went through I thought was an excellent demonstration of how that can be very positive."