Central bank sees need for higher rates if inflation expectations rise significantly
Mortgage holders should brace for potential interest rate increases, as minutes from the latest Reserve Bank of Australia (RBA) meeting reveal the board’s readiness to act if inflation surges.
The June 17-18 meeting highlighted the ongoing challenge of controlling inflation, with RBA governor Michele Bullock (pictured above) and the board acknowledging that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target.
Days after the monetary policy meeting, inflation actually rose, with the Australian Bureau of Statistics (ABS) reporting that the monthly consumer price index rose to 4% in the year to May, up from 3.6% in April.
Although the RBA maintained the cash rate at 4.35% in June, it reiterated its readiness to hike rates if necessary.
The Minutes of the June 2024 Monetary Policy Meeting of the Reserve Bank Board has been released: https://t.co/clZ0e4ZVj9
— Reserve Bank of Australia (@RBAInfo) July 2, 2024
“Raising the cash rate at this meeting could be appropriate if members formed the view that policy settings were not sufficiently restrictive to return inflation to target within a reasonable timeframe,” part of the minutes of the meeting read. “This could be the case if it was judged that inflation was returning to target more slowly than previously assumed or that the gap between aggregate demand and aggregate supply was not closing quickly enough.”
Meanwhile, the argument for keeping the cash rate steady rested on the belief that the economy was still on a trajectory aligned with bringing inflation back to target by 2026, while maintaining as many employment gains as possible.
“Inflation had fallen significantly from its peak in late 2022, inflation expectations were assessed to be consistent with the board’s target and there was evidence that the pace of wages growth had peaked in late 2023,” the minutes stated. “Output growth had continued to be weak, and the output gap was closing.”
RBA board members also noted the importance of not placing too much emphasis on recent inflation signals since the May meeting, particularly due to the complexities in assessing real-time spare capacity and the minimal weight on consumption revisions influenced by imports.
The argument for maintaining the cash rate also strengthened given the potential downside risks to the labour market outlook. Members pointed out that falling vacancy rates could indicate weaker labour market conditions than employment trends suggested. Furthermore, the unemployment rate could rise rapidly, as seen in past instances. While the current rate of business failures was not unusual, a continued rise in insolvencies could negatively impact labour demand.
Upon weighing these options, members concluded that holding the cash rate unchanged was the stronger case. They agreed that the data since the May meeting did not justify altering their assessment that inflation would return to target by 2026, despite some elevated risks.
“Members agreed that it was important to convey that the information received since the previous meeting had reinforced the need to be vigilant to upside risks to inflation, and that the extent of uncertainty at present meant it was difficult either to rule in or rule out future changes in the cash rate target,” the minutes stated.
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