The Reserve Bank says its decision to increase the official interest rate in June rather than pause was “finely balanced”, and further increases would hinge on how developments at home and abroad affect the inflation outlook.

This assessment, contained in minutes of the RBA’s 6 June board meeting released on Tuesday, may ease some of the expectation that the central bank will hike rates much further in coming months. At the June meeting, the bank lifted the cash rate 25 basis points to 4.1%, the highest level since 2012.

“In taking the decision to increase interest rates again, [board] members acknowledged the considerable uncertainty regarding the outlook for household spending and the financial stresses facing some households,” the minutes showed. “Members affirmed their determination to return inflation to target and their willingness to do what is necessary to achieve that.”

The RBA has hoisted interest rates by four percentage points in 12 moves over the past 13 months when it began its rate rise cycle during the May 2022 federal election. Critics have warned that the lagging effects of increases – banks can take a couple of months to pass changes onto borrowers – mean that the central bank was at risk of hammering demand too hard to knock inflation down to its preferred 2%-3% annual rate, sending the economy into a hard landing.

Since the board meeting, though, the May labour market figures have been released. They showed the jobless rate falling unexpectedly to 3.6% from 3.7% in April, with more than 70,000 extra jobs added, or about four time more than market economists had forecast.

The minutes indicate the RBA’s main concern remains whether inflation will prove too persistent, failing to slow to 3% by mid-2025 as it wants. Among the reasons for such stickiness in pricing were “some firms were indexing their prices, implicitly or directly, to past inflation”. There was also the possibility that wage increases were also being indexed to past high inflation and the “potential” was there for such a trend to become widespread.

“These developments created an increased risk that high inflation would be persistent, which would make it more difficult to keep the economy on the narrow path” sought by the RBA of cooling inflation without stalling the economy.

Ahead of the release of RBA minutes later today from the June meeting that hiked the cash rate to 4.1%, investors were viewing odds for another hike in July as about 50:50. By later this year, they are expecting a peak rate of about 4.6% before the cuts slowly arrive next year. pic.twitter.com/A1jGdsWKiU

— @phannam@mastodon.green (@p_hannam) June 19, 2023

The RBA board members noted federal budget had “not had a material effect” on RBA staff forecasts. The 5.75% increase in the Fair Work Commission’s annual wage decision, though, had been higher than staff modelling, and would add directly to the September quarter’s wage price index.

While it was understandable that lowest paid workers would be compensated for high inflation, “it would be concerning if wages across a broad range of jobs were to become implicitly indexed to high inflation”, the minutes showed.

The minutes detailed the case for leaving the cash rate unchanged at 3.85%. The nine board members noted that the “significant increases in interest rates to date” raised the possibility that the economy might slow more sharply than expected. “Members noted that consumption growth was already quite weak, especially in per-capita terms,” the minutes said. “Real disposable incomes were falling, especially for home-loan borrowers, and many renters were experiencing difficult financial conditions.

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Inflation, too, might fall faster than anticipated not least because of falling commodity prices.

The RBA noted that about 10% of household disposable income would be taken up by debt repayments by the end of 2024, up from about 9% in April.

For now, the value of non-performing housing loans had risen a little but from a very low level and personal insolvencies remained at low levels, the board said.


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