AU Monetary Policy Meeting Minutes

Members observed that financial conditions abroad had eased somewhat since the previous meeting, in response to progress towards resolving the conflict in the Middle East. Expectations for central bank policy rates had generally declined, oil prices had fallen significantly and equity prices had risen in many countries. Members acknowledged the indications of a potential resolution of the conflict but noted the ongoing uncertainty over the final outcome and the implications for energy markets. Even after the recent easing in financial conditions, policy interest rate expectations across many advanced economies remained higher than before the start of the conflict in the Middle East. Members noted that the European Central Bank and Norges Bank had both raised interest rates to contain the second-round effects of higher oil prices and address broader concerns about above-target inflation. The US Federal Reserve and Bank of England – both of which had been expected by financial market participants before the conflict to have lowered their policy rates by now – had decided to maintain their policy rates. Financial market participants expected both to lift these rates later in 2026. More generally, financial markets continued to expect that many advanced economy central banks would tighten monetary policy before the end of 2026 in response to above-target inflation and concerns about the inflationary effects of the conflict. Bond yields in many advanced economies, including Australia, had unwound some of their earlier increase since the previous meeting. These falls were in response to both lower oil prices and the flow of economic data. However, yields had risen in the United States and Japan, reflecting stronger economic data. Short-term inflation compensation measures had generally eased but remained higher than before the onset of the conflict in the Middle East. Longer term market expectations for inflation had remained generally stable and consistent with central banks’ targets. The Australian dollar had depreciated a little since the previous meeting, in line with a decline in yield differentials (particularly against the United States) and a modest fall in commodity prices. The trade-weighted exchange rate nevertheless had remained comparable to its level at the onset of the conflict and broadly consistent with its estimated long-run equilibrium level. RBA: ONGOING WEAK PRODUCTIVITY MAY HINDER PROGRESS IN BRINGING INFLATION BACK TO TARGET ... RBA: WILL TAKE NECESSARY STEPS TO ENSURE PRICE STABILITY, INCLUDING POTENTIAL RATE HIKES ... RBA: Interest rates must remain restrictive to bring down excess demand pressures in the economy. RBA: Recent data varied, indicates economy slowing broadly as anticipated

Members commenced their deliberations by discussing the impact of the conflict in the Middle East on global financial conditions. While riskier asset prices had moved in response to the conflict and the resultant increases in oil prices, the net change since the onset of the conflict had been modest. Global equity prices had rebounded from an initial decline, supported by the announcement of a ceasefire and material upgrades to forecast earnings in some sectors, including semiconductors. Corporate bond spreads in advanced economies had retraced the rise observed immediately after the onset of the conflict and remained low relative to history. Measures of expected equity price volatility had increased somewhat but remained well below the levels recorded during earlier episodes of heightened uncertainty, including the announcement of higher US tariffs in April 2025. Members discussed the possibility that financial markets were under-pricing downside risks associated with the conflict, given the contrast between these moves and sharp declines in consumer and business confidence in many jurisdictions. They noted several possible explanations for this contrast, including: a possible expectation among market participants that the conflict would be resolved reasonably quickly; the demonstrated resilience of the global economy in preceding years to a range of significant shocks; the long-run decline in the oil intensity of global output (which is currently around half the level of the early 1990s); and ongoing optimism about the impact of the AI boom on corporate earnings in future. The impact of the conflict on inter Reserve Bank of Australia minutes indicate most members supported a strong case for raising rates, with one member favouring a pause for further information. Reserve Bank of Australia: growth in the Australian economy is expected to stay below trend for an extended period.

Members commenced their discussion of financial conditions by considering the impact on markets of the current conflict in the Middle East. Global prices for oil and other forms of energy had risen sharply, short-term inflation expectations had picked up and financial market volatility had increased. The conflict was likely to pose a material adverse supply shock to the global economy, though members agreed that the eventual scale and persistence of the shock was highly uncertain at the time of the meeting. Consistent with that, market prices had continued to be volatile as market participants revised their assessment of the potential implications in response to the flow of information. Members noted that, despite the pronounced volatility, financial markets had so far continued to function effectively. Market expectations for future central bank policy rates had risen materially in almost all economies since the onset of the current conflict, in anticipation of increased near-term inflationary pressures. This included some central banks that had previously been expected by market participants to lower rates over 2026, such as the US Federal Reserve and the Bank of England, which, at the time of the meeting, were expected to hold rates steady or possibly raise them. Members discussed why markets did not expect most central banks to look through the supply shock emanating from the conflict. They noted that this was more difficult to do when the shock was expected to be large and inflation had been above target for some time (as was the case in many economies). Government bond yields had increased since the start of the current conflict in the Middle East, including in Australia. The largest increases had occurred in countries where near-term expectations for policy rates or inflation had increased most sharply in response to the outlook for higher energy prices or inflation. Market-implied measures of longer term inflation expectations were still well anchored in most countries, including in Australia, as markets expected central banks to adjust monetary policy as required. Risk premia in equity and corporate bond markets had risen a little since the onset of the current conflict, including in Australia, but remained low overall. The largest falls in equity prices had been in economies that were large net energy importers, such as the euro area, the United Kingdom, Japan and Korea. In some Asian markets, these declines had merely offset strong gains earlier in the year. By contrast, the decline in US equity prices since the onset of the conflict had followed their earlier underperformance arising from concerns about the effect of artificial intelligence (AI) on corporate profitability and vulnerabilities in private credit markets. Members turned to assessing the stance of fin Just in | RBA Reports Majority View Financial Conditions as Insufficiently Restrictive, Leaning Towards Supportive RBA minutes show minority saw risk of weaker domestic consumption and looser labor market RBA: MID EAST CONFLICT MAKES PREDICTING THE FUTURE PATH OF THE CASH RATE UNCERTAIN. ... Reserve Bank of Australia says A$ reaction will influence how the conflict affects the economy.

Members commenced their discussion of financial conditions by considering ongoing uncertainty in the global environment. Members noted that a range of new geopolitical and institutional risks had emerged since the previous meeting, including military action, tariff developments and new threats to the independence of the US Federal Reserve. For the most part, these had prompted only modest and short-lived reactions in financial markets. That said, the US dollar had weakened against a range of currencies and there had been strong gains in precious metals prices over much of January. Some of these effects had unwound following the nomination of a new chair of the Board of Governors of the Federal Reserve System, but the US dollar remained lower and gold and silver prices higher than at the start of the year. Compensation for risk in financial markets remained very low. Equity prices had risen in most major advanced economies over prior months, and measures of equity risk premia and expected future volatility were still near long-term lows. Corporate bond spreads had been little changed or had declined across advanced economies over that period. Members discussed why markets were demanding little compensation for risk despite the high level of uncertainty. They noted that this outcome could reflect in part the resilience of major economies, strong private sector balance sheets and fiscal and monetary easing in some economies. Market participants might also be finding it challenging to price genuine tail risks, given uncertainty around the probability, timing and scale of possible adverse events. It was also possible that market participants were factoring in an expectation of strong global central bank responses to any sharp downturn. Members nonetheless concluded that, with this starting point, any crystallisation of downside scenarios could cause a significant tightening of financial conditions. However, the scale and timing of any adjustment was difficult to predict. Australian equity prices had underperformed other markets over preceding months, in part because of a significant rise in expectations for the cash rate and the associated increase in bond yields. That said, demand for securities being issued by Australian firms had remained strong, including from offshore investors. RBA minutes show inflation risks ‘shifted materially’ behind February rate hike GLOBAL GROWTH HAS BEEN MORE RESILIENT THAN EXPECTED WHILE CREDIT EXPANSION AND LOOSE FINANCIAL CONDITIONS ADD TO INFLATION RISKS. POLICYMAKERS STRESSED THEY CANNOT HAVE HIGH CONFIDENCE IN ANY SINGLE FUTURE RATE PATH AND WILL RELY ON INCOMING DATA. RBA SAYS THE BOARD DEBATED KEEPING RATES UNCHANGED BUT ULTIMATELY DETERMINED THE ARGUMENT FOR TIGHTENING WAS STRONGER. ...

Members commenced their discussion of financial conditions by reviewing developments in advanced economy equity markets. Market sentiment had deteriorated briefly amid concerns about elevated valuations, especially for global technology companies. Equity prices had fallen for a period but there had been a subsequent rebound in many countries. In the United States, this partly reflected expectations of additional monetary policy easing. However, the decline in Australian equity prices had been more persistent than in other markets, reflecting a shift higher in the expected path for the cash rate and a reappraisal of valuations in some market segments. Corporate bond yields had increased in some countries, but spreads to government bond yields remained low across the world. Members observed that investors in equity and corporate bond markets continued to price in a benign global economic and financial outlook and appeared willing to accept low levels of compensation for the risk of weaker outcomes. Members noted that financial market participants expected the US Federal Reserve to cut its policy rate at its 10 December meeting, and to continue easing policy in 2026 as the immediate impacts of higher tariffs and prior fiscal stimulus waned. By contrast, the European Central Bank was not expected to cut rates further and the next move in policy rates in Canada, New Zealand, Sweden and Australia was expected to be up. The Bank of Japan was expected to continue gradually raising its policy rate amid persistent inflationary pressures. Members discussed the rise in market-implied expect RBA Considered Potential Rate Increase in 2026: Minutes RBA Flags Upside Inflation Risks Based on Recent Economic Data RBA: MEASURES OF CAPACITY UTILISATION POINTED TO SUPPLY CONSTRAINTS RBA: FULL IMPACT OF POLICY EASING THIS YEAR WAS YET TO BE FELT RBA: BOARD JUDGED LABOUR MARKET WAS STILL A LITTLE TIGHT, OUTPUT GAP POSITIVE RBA: POSSIBLE HOLDING CASH RATE STEADY FOR SOME TIME COULD BE SUFFICIENT TO KEEP ECONOMY IN BALANCE RBA: BOARD FELT IT WOULD "TAKE A LITTLE LONGER" TO ASSESS PERSISTENCE OF INFLATION RBA: BOARD JUDGED IT TOO EARLY TO TO KNOW IF RISE IN INFLATION WOULD PROVE PERSISTENT

Members commenced their discussion of financial conditions by considering central bank policy settings in advanced economies. The US Federal Reserve (Fed) and the Bank of Canada (BoC) had both cut their official rate by 25 basis points at their October meetings, as expected, while the Reserve Bank of New Zealand (RBNZ) had cut its official rate by 50 basis points. Members noted that inflation remained above target in these economies. The BoC and RBNZ expected inflation to decline to their targets over the period ahead, given significant spare capacity in their economies. The Fed had responded to weaker labour market conditions, while noting that inflation was expected to moderate over time but with risks still tilted to the upside. In many advanced economies, market expectations were for policy rates to be cut further over the coming year as economic conditions weaken. However, policy rates were expected to be steady in Canada, where policy had already been eased significantly, and in the euro area, where the unemployment rate remained low and inflation was close to target. The Bank of Japan was expected to raise its policy rate further in response to persistent inflationary pressures, despite ongoing weak growth. Members noted that the Fed had announced in October that it would conclude its balance sheet runoff. This reflected a judgement that reserves were reaching ‘ample’ levels, given signs of pressure in a range of US money market rates. Sovereign bond yields had fallen noticeably in the United States, Canada and New Zealand over preceding months, as expectations for the future path of policy rates had declined. In the United States, market measures of short-term inflation compensation had also fallen, though longer term measures had remained relatively stable. Long-term government bond yields in Australia were little changed. RBA: It’s unclear if monetary policy is still restrictive, unlike the definitive signals in 2024. RBA: Australian dollar remains aligned with estimated fair value. RBA SAYS POLICY EASING COULD STILL OCCUR IF THE LABOR MARKET WEAKENS SIGNIFICANTLY OR GROWTH FALLS SHORT. ... RBA: CASH RATE COULD STAY AT PRESENT LEVEL IF ECONOMIC DEMAND RECOVERS FASTER THAN EXPECTED. ...