The Reserve Bank board deliberated on keeping official interest rates steady due to growing pressures on households but ultimately chose to raise them out of concern that inflation could become entrenched.
Here are the key takeaways:The RBA board expressed concern about recent increases in property prices.It acknowledged that higher interest rates are impacting households unevenly.The RBA aims to create the perception that inflation is on a downward trajectory.The board intends to raise Australia’s unemployment rate from 3.6 per cent to around 4.5 per cent and believes higher interest rates will assist in achieving this goal.According to RBA Deputy Governor Michelle Bullock, while historically tight labour markets have benefited many workers, the current high level of employment is likely too elevated and contributes to inflation.
During a recent speech, Bullock stated that the RBA’s objective is to restore a better balance between labour supply and demand in the market. This will be accomplished by temporarily slowing down employment and economic activity through higher interest rates.
The minutes from the June 6 meeting, where the cash rate was increased to 4.1 per cent, reveal that the RBA board carefully weighed the arguments. The possibility of sustained inflation leading to even higher interest rates in the future was a significant risk.
Ultimately, the board decided to proceed with the 12th rate hike since May of the previous year. It concluded that failure to address inflation promptly could necessitate more aggressive rate hikes, potentially resulting in a sharp rise in unemployment.
RBA members highlighted that an extended period of above-target inflation could foster an inflationary psychology, with firms and households incorporating rising inflation into their budgetary considerations. The minutes warned that this could lead to persistently high inflation, requiring interest rates to remain elevated for a prolonged period. Such a scenario would increase the risk of a significant increase in unemployment, adversely affecting low-income individuals and exacerbating cost-of-living pressures.
The minutes also indicate the RBA board’s concern regarding rebounding real estate prices, which suggests a reduced drag on consumer spending in the upcoming year.
The alternative option of maintaining the cash rate at 3.85 per cent was based on evidence of a rapidly slowing economy, with the potential for further interest rate hikes to exacerbate the anticipated deterioration.
The recent increase in the minimum wage is seen as the initial step in a crucial shift in
wage-setting, as noted by Gareth Hutchens.
Additionally, the board considered the impact of fixed-rate mortgages expiring in the coming months, which could lead to further tightening of financial conditions and a greater-than-expected rise in unemployment.
Despite acknowledging the financial strain experienced by households due to rising interest rates, the RBA board chose to raise the cash rate.
The board affirmed its commitment to monitor the implications and developments in the global economy but remained determined to bring inflation back within the 2 to 3 per cent target range.
The decision by the Fair Work Commission to raise award wages by 5.75 per cent was deemed understandable to compensate the lowest-paid workers for high inflation. However, the board cautioned against a broad-based wage breakout tied implicitly to high inflation.
Since the June 6 decision, stronger-than-anticipated labour force data has heightened expectations of further rate increases. In May, the unemployment rate dropped to 3.6 per cent with the addition of 75,900 new jobs.
Money markets are now factoring in a 90 per cent probability of another rate hike at the RBA’s meeting on July 4, which would raise the cash rate to 4.35 per cent.