Slowing economic growth helping to drag inflation down and a recognition that some households faced “acute financial challenges” were among the reasons the Reserve Bank left interest rates on hold earlier this month.
Minutes from the RBA’s August meeting, released on Tuesday, showed the board viewed the risks facing the economy as “broadly balanced” between allowing inflation to remain too high for too long or slowing the economy too hard.
The central bank board considered lifting the cash rate another 25 basis points to 4.35%, which would have been the 13th increase since it began tightening monetary policy in May 2022. However, it decided that it had more time to observe developments at home and abroad, and extended the pause for a second month.
“[Recent] information on inflation had been encouraging, the economy was expected to grow only slowly over the period ahead and this would help with the further moderation of inflation,” the minutes show.
“At the same time, members agreed that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe.”
The August meeting, the penultimate under the governorship of Philip Lowe, followed the release of June quarter consumer inflation data showing price increases were running at annual rate of 6%, slightly less than economists had forecast. On a quarterly basis, they rose 0.8%, a number matched by wage gains, according to details released this morning.
The RBA board noted the decline in real household income – as prices rose faster than wages – could contribute to a faster drop in inflation.
“[Inflation] could fall faster than anticipated if the decline in real household disposable income over the prior year weighs more heavily on consumption,” the RBA said.
Other factors, though, could mean inflation does not return to RBA’s target range of 2%-3% by “around mid-2025”. One of these was a persistent high rate of price inflation for services, which increased in the June quarter.
Similarly, if productivity growth – stagnant for three years – did not recover, or if wage growth turned out to be “more responsive to the tight labour market than assumed”, inflation might not decline as the RBA wants to see.
The board also noted its forecasts, including for the economic slowdown to reach a “trough” by the end of the year, were “conditioned on a further increase in the cash rate”.
Prior to today, only the NAB among the big four banks expected the RBA cash rate to be lifted again during the current cycle. They were forecasting another 25 basis point increase, probably by the RBA’s November meeting on Melbourne Cup Day.
Considerations supporting the August rate pause extension included weak retail sales growth, with the value of turnover “essentially unchanged since September 2022”, the board noted.
The board highlighted “a diversity of experience” among individual households as inflation and higher borrowing costs worked their way through the economy.
“[Consumption] outcomes for some mortgagors and renters were judged likely to be considerably weaker than the aggregate, since some of these households face acute financial challenges,” the minutes said.
International influences on Australia were mixed. On the one hand, recent economic data particularly for North America “had surprised on the upside”.
On the other, the outlook for Australia’s biggest export market, China, had lately been revised lower and “was subject to a high degree of uncertainty”. Key to that outlook was whether household spending picked up and the scale and effectiveness of government action to support the economy, particularly the property sector.
As a result of China’s weaker than anticipated recovery from Covid lockdowns, growth in Australia’s major trading partners had been revised down in the past three months. They were expected to grow 3.25% in 2023 and slow to 3% in 2024, well-below pre-pandemic levels, the RBA said.
