The Reserve Bank’s February board minutes reveal a central bank increasingly concerned that inflation could remain elevated for longer than previously expected, prompting a reassessment of the policy outlook.
“Members noted the staff’s judgement that, while the larger part of the increase probably reflected less-persistent factors that would fade over time, some of it was due to underlying inflationary pressure that would be likely to persist with current policy settings,” the minutes say.
That assessment has driven a significant upgrade to the inflation outlook.
“In light of that judgement, the central projection for inflation had been revised materially higher, remaining above target throughout 2026 and only returning close to the midpoint of the target range around mid-2028 on the assumption that the cash rate follows the market path.”
The shift in the board’s view of risks was particularly notable.
“Members also judged that the risks surrounding the Board’s two objectives had shifted materially since the previous meeting, in ways that warranted tighter monetary policy,” they say.
“Regarding risks to meeting the Board’s inflation objective, members emphasised that the staff forecast is for inflation to stay above the midpoint of the target range for at least another two years.
“This forecast was constructed on the technical assumption that the cash rate follows the market path, which envisaged two increases in 2026 and a little more thereafter.
“Members observed that if this inflation outlook proved true, it would extend the already long period during which underlying inflation had mostly been above the target range.”
Labour market concerns ease
While inflation risks have intensified, concerns about the labour market have eased. The minutes note that “the downside risks” to employment “appeared to have abated.” The labour market remains “a little tight” and wages growth has slowed “only gradually.”
Instead, attention has turned to financial conditions, which have undergone a “material easing since mid-2025.” Credit is “growing strongly” and banks are “lending freely,” prompting members to agree “they could no longer be confident that conditions were restrictive.”
“Excess demand was unlikely to be corrected if the cash rate remained at 3.60 per cent,” the minutes say.
With inflation forecast to remain above the 2–3 per cent target range throughout 2026, markets are now pricing in additional rate rises. The minutes make clear the board views the latest increase not as a one-off move, but as part of an ongoing process of policy tightening.