Reserve Bank of Australia (RBA) board members decided to leave the cash rate unchanged at 4.35 per cent in June because they believed earlier interest rate increases were beginning to restrain the economy, while ongoing uncertainty surrounding the conflict in the Middle East made it prudent to wait before considering any further policy move.
Minutes from the meeting showed policymakers considered financial conditions to be “somewhat restrictive” after three rate increases since the start of the year.
Members agreed there was “merit in using the space provided by the RBA’s earlier decisions to raise the cash rate target to assess how the economy was adjusting and the impact of disruptions to oil supply”.
The board stressed the decision was not driven by confidence that inflation had been brought under control. Instead, members agreed inflation remained “materially above the board’s target”, with staff continuing to expect underlying inflation to increase in the June quarter.
They also noted forecasts prepared in May indicated it would be “a further two years before inflation returned sustainably to target”, meaning monetary policy still needed to remain restrictive to unwind excess demand.
Board members further outlined that developments in the Middle East were another key reason for caution.
Although an interim peace agreement between the United States and Iran had eased financial markets and pushed oil prices lower, members said it was still too early to judge whether the improvement would last.
Even if the emerging resolution proved enduring, the RBA agreed global commodity supply constraints would “take some time to resolve” and recent fuel supply disruptions were still likely to lift underlying inflation.
Those competing forces ultimately persuaded the board to wait. Members agreed that leaving the cash rate unchanged “would best balance the Board’s inflation and employment objectives”, while allowing more time to observe how previous policy tightening and global events flowed through to households and businesses.
Meanwhile, evidence presented to the board suggested higher interest rates were beginning to work.
Conditions in the housing market had softened, housing credit growth appeared set to slow and banks had passed higher borrowing costs through to customers.
Scheduled mortgage repayments had increased, while financial market participants had also revised down expectations for future interest rate moves following softer domestic inflation and labour market data.
The broader economy, however, continued to present a mixed picture. Australia’s economy expanded 2.5 per cent over the year to the March quarter, household consumption had begun easing and public demand was weaker than expected.
Offsetting that, private business investment was considerably stronger than forecast, largely because of spending on artificial intelligence-related data centres, which members warned could intensify capacity constraints and skills shortages elsewhere in the economy.
While April’s labour market data came in weaker than expected, the board cautioned against placing too much weight on a single month’s figures.
Total hours worked and underemployment remained relatively resilient, job advertisements pointed to broadly stable labour demand and members concluded the labour market was only “a little weaker” than anticipated in May.
Members also remained concerned about domestic inflation pressures beyond energy prices.
Business surveys continued to point to elevated cost pressures, firms were increasingly passing those costs on to consumers and persistently weak productivity growth was keeping unit labour costs above their long-run average.
The board warned weaker productivity could impede progress in returning inflation to target.
Despite holding rates, the minutes indicated policymakers were far from ruling out further tightening.
Members identified renewed disruption in the Middle East, sustained high oil prices and persistently weak productivity as the principal risks to the outlook, concluding they would remain attentive to incoming data and “do what it considers necessary” to achieve price stability and full employment, including increasing the cash rate if required.
