Earlier this month, the Central Bank left the interest rate unchanged at 4.25 percent, admitting it was not projecting anything in or out given still stubborn core inflation and uncertainty surrounding global events.

The RBA’s latest minutes, published on Tuesday, revealed that while the central bank believes inflation could return to its target in 2026, key factors could push it off course.

The central bank’s latest forecasts are based on several critical assumptions, including a moderate recovery in consumer spending. However, there are scenarios that could disrupt this outlook.

"Members recognized that it is important to be prepared to adjust the future stance of monetary policy as the economic outlook evolves." The members therefore considered the conditions that could justify either a future change in the target cash rate or a decision to keep it at its current level for an extended period,” the bank's minutes said.

Namely, if consumer sentiment remains weak or if consumption does not pick up as expected, the central bank may consider cutting interest rates to stimulate demand.

Conversely, if the recovery in consumption turns out to be sharper than anticipated, leading to higher-than-expected inflation, the RBA may need to keep interest rates on hold for longer.

The labor market remains another crucial factor.

According to recent minutes, members discussed scenarios where the labor market assessment turns out to be inaccurate, leading to a more significant easing of conditions than expected. In such cases, a more stable monetary policy may be justified. This could happen, he says, if firms are currently hoarding and eventually be pushed to reverse that strategy.

"Such trends were not yet widely evident from the RBA's engagement with firms, but members noted that if forecast indicators begin to suggest widespread easing of future labor market conditions and more rapid easing of inflation, the board may need to consider a political response.”

Alternatively, the RBA said that if its assessment of current projections for the economy's potential growth were too optimistic, or the economy's supply-side capacity turned out to be more constrained than expected, it would necessitate a tighter monetary policy response.

It is also monitoring global risks, from economic changes in the US to potential changes in Chinese policy, which could further complicate the outlook.

The RBA's last board meeting was held before the US election results, but the board estimated that regardless of the winner, US fiscal deficits are projected to be large, making sovereign debt markets more sensitive to adverse shocks over time .

The RBA is becoming increasingly impatient with high inflation

While the bank remains committed to its inflation target, evolving economic conditions suggest the cash rate may remain on hold for some time, but future decisions will depend heavily on how these factors play out.

After all, given the already long period in which inflation has been above target, the board noted its "minimum tolerance" for accepting higher for longer inflation, even if this occurs due to factors that limit the capacity of supply to the economy.

"However, there were also scenarios where inflation declined substantially faster than currently forecast, perhaps in response to emerging signs that rental markets in many cities are moving into better balance or because energy rebates have more pervasive effect than considered,” the protocols detail.

While this could justify easing the cash rate target, the board agreed that more than one positive quarterly inflation result is needed to be confident that such a decline in inflation is sustainable.

Members also noted that monetary policy may need to be adjusted if the board takes the view that the policy stance is not as restrictive as it has been assessed.

"They agreed that it was important to pay close attention to potential signs of this, including credit growth developments, banks' willingness to lend and asset price growth."

"Returning inflation to target remains the board's highest priority and it will do what is necessary to achieve this," it said.