Australia’s central bank, the Reserve Bank of Australia (RBA), has decided to keep interest rates steady this month due to concerns that the current policy is restricting economic growth and could lead to a sharp downturn and higher unemployment. However, the RBA has also warned that some tightening may still be required to control inflation.
At the July 4 policy meeting, the RBA board considered raising the cash rate by 25 basis points to 4.35 percent but ultimately decided on a pause. The minutes of the meeting revealed that the board acknowledged the strength of both arguments but chose to hold the cash rate steady and reassess the situation at the August meeting.
The RBA’s monetary policy stance is already restrictive and is expected to tighten further with the impending resets of low-fixed rate loans. In May, mortgage interest payments already accounted for a record share of household disposable income.
Although the RBA left interest rates unchanged at 4.1 percent this month, the markets are anticipating a pause in August. However, they have fully priced in a quarter-point increase in interest rates by the end of the year.
The minutes also highlighted a pull-back in inflation, with consumer prices showing a slowdown to a 13-month low of 5.6 percent in May. This decrease in inflation could help mitigate the risk of a rise in medium-term inflation expectations.
Another concern expressed by the RBA board is the possibility of slower economic growth than anticipated, which could result in a higher-than-expected rise in the unemployment rate. The board noted that there is considerable uncertainty regarding the resilience of household consumption and that the squeeze on households’ finances could lead to a sharper decline in consumption than what is currently forecasted.
To gain a better understanding of the situation, the RBA board agreed to reassess the data on inflation, the global economy, the labor market, and household spending in August. They will also consider an updated set of staff forecasts and a revised assessment of risks.
In conclusion, the RBA has hit pause on its policy as it recognizes the restriction it imposes on economic growth and the risks associated with a squeeze on household finances. While inflation is showing signs of slowing down, there are still concerns about rising inflation expectations due to factors such as higher rents, weak productivity, and increased electricity prices. The board will carefully consider all these factors before making any further adjustments to interest rates.
