Policymakers agree financial conditions are now ‘probably somewhat restrictive’.
The Reserve Bank has made its clearest admission yet Australia’s high interest rates are now slowing the economy – while warning it is still prepared to hike again if inflation doesn’t fall.
Minutes from the RBA’s June monetary policy board meeting, released on Tuesday, showed policymakers agreed financial conditions are now “probably somewhat restrictive” – one of the strongest acknowledgements yet that higher interest rates are biting Aussies.
Graph of the Cash Rate Target. Source: RBA
That saw the board ultimately vote unanimously to leave the cash rate unchanged at 4.35 per cent – with the minutes revealing board members deliberately chose to pause to see how the economy responds to earlier rate increases, rather than because they thought the inflation fight had been won.
“There was merit in using the space provided by the Board’s earlier decisions to raise the cash rate target to assess how the economy was adjusting,” members agreed.
The minutes show board members see higher rates beginning to work as expected, with housing market conditions softening and housing credit growth expected to slow.
But do not expect the board to take their finger off the rate trigger, with the minutes revealing they believe monetary policy needs to stay restrictive for some time yet.
Past and present monetary policy board members. Source: RBA
The RBA document showed members expect underlying inflation to increase in the June quarter, warning inflation could still take another two years to return sustainably to the RBA’s 2 to 3 per cent target under its existing forecasts.
The board also warned widespread labour and business cost pressures remained, while uncertainty surrounding global oil prices and the Middle East continued to pose upside risks to inflation.
“The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome, including increasing the cash rate target if necessary,” the minutes said.
Persistently weaker productivity is also a growing risk, the board found.
Members agreed to continue closely monitoring incoming economic data before deciding what further action was needed.
Interest rate decisions since November. Source: RBA
ANZ Bank head of economics Adam Boyton said the RBA minutes did not change his bank’s view that the cash rate would remain at 4.35 per cent for the next year or so “notwithstanding that the minutes underscore the Board’s hawkishness and hence the risk of a further rate hike”.
“There is likely to be a reasonable degree of tolerance on the part of the Board for weak activity data, given the inflation outlook. Inflation remained materially above the Board’s target, and members noted that the staff’s May forecasts (which were based on available data and conditioned on market expectations for interest rates at that time) envisaged that it would be a further two years before inflation returned sustainably to target,” he said.
“Against that backdrop, members agreed that monetary policy needed to remain restrictive to unwind current excess demand through a period of below-trend growth. On the early signs of a resolution to the Middle East conflict, members: noted that, if the emerging path to resolution of the conflict proves enduring, it could reduce the extent to which firms pass on higher costs to consumer prices. However, they acknowledged that, even in that case, it was still likely that underlying inflation would increase to some extent in response to recent fuel supply disruptions.”
English (US) · 