SYDNEY, May 21 (Reuters) - Australia's central bank decided to stand pat on interest rates at its May meeting in part to avoid "excessively fine-tuning" policy, but judged a hike might be needed if forecasts on inflation proved too optimistic.
Minutes of its May 6-7 board meeting out on Tuesday showed the Reserve Bank of Australia (RBA) considered raising its 4.35% cash rate given the run of domestic economic data had been mostly stronger than expected and risks to inflation had risen somewhat.
However, the board judged the case for holding steady was stronger given the central bank's economists were predicting weak consumption growth and a continued moderation in inflation to the central bank's target band of 2%-3% in late 2025.
The board considered those forecasts - centered on no change in the cash rate this year - were "sound", with balanced risks.
"Importantly, inflation expectations remained well anchored," the minutes showed.
"Given this, and the higher-than-usual level of uncertainty about the economic outlook, members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning."
Economists at the bank earlier this month forecast inflation, which ran at 3.6% in the first quarter, to reaccelerate by the end of the year, but those forecasts have been rendered obsolete after the government announced billions of electricity and rent subsidies to lower headline inflation in the coming year.
Financial markets, which had been wagering on a real chance of another hike in rates after a strong inflation reading in the first quarter, are now back to betting the next policy move would be down after wages and jobs data disappointed last week.
However, the first easing was seen as unlikely to come until December, with an implied probability of about 50%.
In the minutes, the board members expressed limited tolerance for inflation returning to target later than 2026, and noted rates can go up again if the board formed a view that the judgments underpinning the forecasts risked being "overly optimistic".
They noted it was possible consumer spending could pick up somewhat more rapidly given the strength in the labour market, and the growth in public demand and business investments could accelerate, delaying the return of inflation to target.
"The minutes of the May RBA Board meeting have a slightly more hawkish tinge than we took from the post-meeting statement," said Adam Boyton, head of Australian economics at ANZ.
Still, Boyton said he was left with the impression that any resumption of tightening from the RBA would require the Board to be of the view that inflation was unlikely to return to the band over the next few years.
"The hurdle to act is now higher than November's risk management tweak," he added, referring to RBA's last rate hike in November. (Reporting by Stella Qiu; Editing by Wayne Cole and Muralikumar Anantharaman)
