Australia’s central bank remains vigilant to slowing progress on inflation yet the minutes from the last interest rate meeting signal a reluctance to lift them again.
In keeping with the Reserve Bank of Australia’s assertion the narrow path is getting “narrower”, the minutes show a board attune to the risk of the jobs market deteriorating rapidly.
Spelling out the thinking behind keeping interest rates on hold at 4.35 per cent in June, which was widely expected, the central bank board said falling job vacancies could be indicative of a weaker-than-expected labour market.
“Moreover, the unemployment rate could rise quickly once it did start to rise, as had occurred in the past,” the minutes said.
As flagged by Governor Michele Bullock, there was no talk of cuts but the case to hike interest rates and to keep them on hold were both discussed.
The June meeting pre-dated a hotter-than-expected monthly inflation print, which prompted economists to warn the wait for cuts could be longer than thought and the risk of another rate hike was rising.
ANZ head of Australian economics Adam Boyton said the minutes contained “no smoking gun” pointing to an interest rate hike at the next meeting in August.
The bank’s economic team believe interest rates will stay on hold until cuts start in February, though Mr Boyton acknowledged “there is some risk that the next move is a hike”.
While there were a few reasons to be concerned about the inflation outlook, including the April consumer price index and upward revisions to household consumption, ultimately the flow of data was not enough to threaten the RBA’s timeline to return inflation to target by 2026.
“It was still possible to achieve the board’s strategy of returning inflation to target in a reasonable timeframe without moving away significantly from full employment, even though this ‘narrow path’ was becoming narrower,” the minutes said.
But much hinges on upcoming June quarter inflation data and RBA staff investigations into spare capacity in the jobs market as well as the economic impact of state and federal budgets.
That information looks set to be presented alongside new economic forecasts released on the same day as the August cash rate decision.
Elsewhere, inflation expectations tracked in ANZ and Roy Morgan’s weekly consumer confidence survey clocked the largest increase in nine months following the strong May consumer price print.
The central bank wants to keep household expectations of where prices are moving in the future contained because these beliefs can influence the actual trajectory of inflation.
Overall consumer confidence stayed subdued, though more people indicated willingness to make a major household purchases last week, reflecting an appetite for discounted goods from end-of-financial year sales.
Poppy Johnston
(Australian Associated Press)