On July 17, 2023, the Reserve Bank board announced it had kept official interest rates steady for a fortnight out of concern that further increases would result in an unanticipated rise in unemployment by year's end. The RBA board's July 4 meeting minutes reveal fears that raising interest rates will compel families to save more and probably have a detrimental impact on a labor market that has been thus far robust, according to a recent report by ABC Australia.
"Members observed there was considerable uncertainty about the resilience of household consumption," ABC Australia quoted from the minutes from the Reserve Bank of Australia (RBA) July 4 board meeting. "The squeeze of many households' finances would … encourage households to save more which would affect consumption."
According to the report, because of concerns that further increases could result in an unanticipated increase in unemployment by the end of the year, the Reserve Bank board decided to keep official interest rates on hold a fortnight ago. The RBA board's July 4 meeting minutes reveal fears that raising interest rates will make households save more and probably have a detrimental impact on a labor market that has been thus far robust. When monthly numbers for June are revealed on Thursday, it is widely anticipated that the current seasonally adjusted unemployment rate of 3.6% will remain stable. However, other economists predict that unemployment will grow to 3.7% as the economy starts to feel the effects of the economy's 12 rate increases since May of last year. By the time inflation returns to the target range in the middle of 2025, the RBA itself anticipates that unemployment will have increased to roughly 4.5%, but other analysts anticipate a quicker increase, according to ABC Australia.
In spite of the fact that inflation has remained high, the RBA board decided to hold the cash rate stable at its July 4 meeting in order to analyze the effects. The minutes reveal that underlying inflation measures remained high in May at 6.4%, despite indications that inflation is gradually slowing down. The board decided to "reassess the situation" in August, following the release of the following detailed quarterly inflation data, while acknowledging that "some further tightening" may be necessary to achieve the 2 to 3 percent target for inflation within a reasonable amount of time, according to the ABC Australia report.
"The reality that most of us face is that productivity growth has slowed down in most of our economies. That means it's a real problem," Phillip Lowe, Governor of the RBA, said.
The board did reiterate its promise to "do what is necessary" to bring inflation down. Concerns that inflation may remain high for "an extended period" and the danger of inflation being entrenched through expectations of rising prices without further tightening were the justifications for raising the cash rate, according to the report. A tight labor market and indications that the housing market was stabilizing with prices rising once more were other justifications for raising interest rates. The minutes also raised issues with the fact that 9.4% of household income is currently going toward mortgage payments.
