Higher interest rates are having the intended effect in the economy, the Reserve Bank says, but three hikes in three months may have pushed households too far.
Minutes from the RBA’s June monetary policy board (MPB) meeting on Tuesday confirm the bank went into its decision feeling financial conditions in Australia have become “probably somewhat restrictive”.
It comes after the bank held the cash rate steady at 4.35% earlier this month following three rate hikes between early February and early May.
While the latest insight into the RBA’s thinking shows the bank is confident in its 2026 tightening cycle, it’s clear the bank is not taking its foot off the gas when it comes to more rate hikes.
Forecasts from both the Reserve Bank and the Treasury expect inflation to peak in June, with underlying inflation not expected to be back in the bank’s 2-3% target range until late 2028.
It’s a long wait for the low and stable inflation the bank relies on to confidently loosen its policy stance.
Despite this, the minutes show the MPB is confident the economy is now in a position for it to hold fire, just as geopolitical tensions appear to be easing somewhat.
“The interim peace agreement between the United States and Iran was a welcome development but this was only the first stage of resolving the conflict in the Middle East,” the minutes read.
“Members judged that there was merit in using the space provided by earlier decisions to raise the cash rate target to assess how the economy was adjusting and the impact of disruptions to oil supply.”
Global oil prices had eased in the lead up to the RBA’s most recent meeting on 16-17 June, but are still higher than before the Iran War began in February, leaving households under pressure.
Fuel tanker unloading at the Eyre Peninsula, South Australia. Picture: Getty
Four months of increased fuel and food prices on the back of the crisis have seen consumer confidence plummet and home price values fall.
The meeting minutes say the unanimous decision from the nine MPB members to hold the cash rate in June would give “time to assess the ultimate impact on the economy" since hikes began in February.
“At this stage, [tightening] appeared to be having broadly the expected effect,” the minutes state. “Expectations for the future path of monetary policy had eased noticeably since May in response to lower global oil prices and weaker-than-expected data for both the labour market and headline inflation.”
The RBA said the effect of its rate hikes were particularly being felt in the slowing housing market, while tax changes for investors announced in the federal budget were also causing buyers to pull back.
Home prices nationally decreased by 0.04% in May, the Home Price Index shows, having also declined 0.1% in April. June's figures from PropTrack will be released on Wednesday.
Slow productivity and stagnating economic growth were also mentioned as contributing factors to the bank’s decision to keep interest rates on hold.
“[Members] discussed both the associated measurement challenges and the broader implications for the supply side of the economy,” the minutes read.
The economy grew 2.5% over the year to March, slightly slower than the 2.6% recorded in the December quarter, according to Australian Bureau of Statistics data.
The weaker-than-expected growth tipped expectations strongly towards the rate hold then seen in June, with stagnation still a lingering concern for the Reserve Bank while inflation is high.
The possibility of stagflation – where high interest rates coexist with little or no economic growth – has been on the RBA’s radar over the last few months but was largely dismissed by RBA governor Michele Bullock in her appearance before the Senate Standing Committee on Economics earlier this month.
Historically the Reserve Bank of Australia (RBA) typically considers stimulating the economy with rate cuts when economic growth is low, though this is only one option and not always the best move.
While it’s almost indisputable that high inflation will linger in the economy throughout 2027, the RBA this week revealed it has been working on a new framework for managing “future episodes in which the cash rate is very low”.
RBA assistant governor Christopher Kent (L). Picture: AFP Photo/Peter Parks.
Assistant governor Christopher Kent spoke through the bank’s new MPB framework for additional monetary policy tools that could be utilised for stimulus rather than just interest rates.
These include lower funding facilities similar to Covid measures, allowing banks to borrow more cheaply, along with government bond buying and changes to yield targets to pin borrowing rates at particular levels.
“How would we approach a future episode when interest rates are low, and more stimulus is still required? At its core, the answer is straightforward,” Mr Kent said. “Rely on the cash rate first and foremost. Use additional tools if necessary.”
The next cash rate decision will be on 11 August.
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