The Reserve Bank of Australia (RBA) is seen inside the central bank building in Sydney, Australia, on May 2, 2022.
Brendon Thorne | Bloomberg | Getty Images
The Reserve Bank of Australia decided this month to hold interest rates steady because policy is clearly restrictive and tightening household finances could lead to a sharp economic downturn and higher unemployment.
The bank, however, withheld its warning that some austerity measures may still be needed to curb inflation, but it was concerned that the broader inflationary impact of rising rents, weak productivity and higher electricity prices had not yet been fully priced in.
Minutes of the July 4 policy meeting, published on Tuesday, showed the Reserve Bank of Australia (RBA) board considered raising the cash rate by 25 basis points to 4.35% before deciding to pause, acknowledging that both sets of arguments were strong.
“Noting the uncertainty about the outlook and the sharp rise in interest rates to date, members agreed to keep cash steady and to reassess the situation at their August meeting,” the minutes showed.
The stance of monetary policy is already restrictive and will tighten further given the sharp adjustment in low fixed-rate lending ahead. Mortgage interest payments as a share of household disposable income hit a record high in May.
The RBA left rates unchanged at 4.1% this month, its second pause since last May, when it began raising rates by as much as 400 basis points in just 14 months.
The market favors the RBA pausing in August, even though they have fully priced in a 25 basis point rate hike by the end of the year.
The minutes noted that a pullback in inflation (monthly data showing consumer price growth slowed to a 13-month low of 5.6 percent in May) would help mitigate the risk of a rise in medium-term inflation expectations.
There is also a risk that economic growth will slow more than expected, with the board recognizing that unemployment could rise more than needed to reduce inflation (expected to be around 4.5%).
“Members observed that there was considerable uncertainty about the elasticity of household consumption and that the tightening of many household finances could lead to a sharper slowdown in consumption than current forecasts imply.”
The board agreed to reassess the situation in August, pending more data on inflation, the global economy, the labor market and household spending, as well as updated workforce forecasts and a revised risk assessment.