The Reserve Bank of Australia (RBA) has published minutes from the June meeting o f its monetary policy board, in which it lifted the cash rate by a further 25bps to 4.1 per cent.
This marked the 12th hike since the RBA commenced its monetary policy cycle, which has delivered a cumulative 400bps in monetary policy tightening.
The RBA has confirmed the higher than anticipated pick-up in annualised inflation and the Fair Work Commission’s recent decision to lift award wages by 5.75 per cent supported the case for a rate hike.
However, despite recent commentary suggesting the June rate call signalled a hawkish revision to the RBA’s monetary policy strategy, the minutes have revealed the decision was “finely balanced”.
The RBA considered the cash for both a hike and a hold, but ultimately decided the former case was a “stronger one”.
“The board affirmed that its priority is to return inflation to target within a reasonable timeframe,” the RBA noted.
“The recent data suggested that inflation risks had shifted somewhat to the upside. Given this shift and the already drawn-out return of inflation to target, the board judged that a further increase in interest rates was warranted.
“This increase would provide greater confidence that inflation would return to target over the period ahead.
“An extended period of high inflation would distort the economy and exacerbate cost-of-living pressures, hurting those on low incomes the most. Sustained high inflation would also lead to even higher interest rates in the future and a worse outlook for the labour market.”
Since the board’s June meeting, national accounts data for the March quarter was released, along with the latest monthly labour market statistics.
The results were conflicting, with GDP slowing to 0.1 per cent, while the unemployment rate fell back to 3.6 per cent.
Despite the faster than expected slowdown in aggregate economic growth, resilience in the labour market and an upward pressure of wages is tipped to support the cash for further tightening.
Several senior economists have revised their projections for the terminal cash rate.
Among the big four banks, ANZ and the Commonwealth Bank have called a terminal cash rate of 4.35 per cent, while NAB and Westpac expect rates to hit 4.6 per cent over the coming months.
However, the RBA has acknowledged its tightening cycle has weighed on households, reflected in a sustained decline in household spending.
“In taking the decision to increase interest rates again, members acknowledged the considerable uncertainty regarding the outlook for household spending and the financial stresses facing some households,” the RBA noted.
“Given this, they agreed to continue to monitor trends in household spending closely and consider the implications for the inflation outlook, as well as developments in the global economy and the domestic labour market.”
In its analysis of the minutes, ANZ Research noted it was not “particularly hawkish”, adding unlike previous minutes, there was no mention of the need for further increases.
“Ultimately, the minutes had something for everyone — with talk of upside risks to inflation since May, but also optimism on productivity and unit labour costs from here,” ANZ Research observed.
Despite softer rhetoric from the RBA, ANZ still expects further hikes in the months ahead, with an increase in July “the most likely outcome”.
The central bank remains determined to bring inflation back to the 2-3 per cent target range, and says it continues to expect to achieve its objective via the ‘narrow path’ — combating inflation while preserving gains in the labour market.
“Members reaffirmed their determination to return inflation to target and their willingness to do what is necessary to achieve that,” the RBA minutes read.