Minutes from the July 4 policy meeting released on July 18 reveal the central bank of Australia determined to maintain the current level of interest rates. This comes as members of the Reserve Bank of Australia's (RBA) board determined the current course of action was restrictive and that there was a chance that a strain on household finances may trigger a severe downturn and rising unemployment, according to a recent report by The Business Times.
“Members observed that there was considerable uncertainty about the resilience of household consumption and that the squeeze on many households’ finances could result in consumption slowing more sharply than implied by the current forecasts,” The Business Times quoted from the released minutes.
According to the report, the RBA made the decision to keep interest rates unchanged this month due to the country's restrictive policies and the possibility that a squeeze on household finances might trigger a severe downturn and an increase in unemployment. The bank did not remove its caution, however, that additional tightening might be needed to bring inflation under control because the wider implications of higher rents, low productivity and higher electricity prices on inflation had not been completely taken into account. The Reserve Bank of Australia board debated hiking the cash rate by 25 basis points to 4.35%, noting that both sets of reasons were compelling, according to minutes of the July 4 policy meeting that were released on Tuesday, July 18.
Given the considerable resets of low fixed-rate loans that are coming, the posture of monetary policy, which was already severe, is likely to become even more restrictive. In May, mortgage interest payments already represented a record percentage of total family disposable income. This month, the RBA held interest rates steady at 4.1%, marking the second pause since May 2014, when it began rising rates by a massive 400 basis points in just 14 months, according to The Business Times report.
“Noting both the uncertainty around the outlook and the significant increase in interest rates to date, member(s) agreed to hold the cash steady and reassess the situation at the August meeting,” Business Times quoted from the meeting's minutes.
Although they have fully priced in a quarter-point increase in interest rates by year's end, markets are leaning towards the RBA taking a break in August. The minutes stated that a decrease in inflation would lessen the danger of an increase in medium-term inflation expectations, with the monthly data showing that growth in consumer prices fell to a 13-month low of 5.6% in May, according to the report. While the board is aware of the prospect that the unemployment rate could increase above the rate necessary to reduce inflation, which was anticipated to be at roughly 4.5%, there is also a risk that economic growth slows more than predicted. The board decided to revisit the situation in August after obtaining new information on inflation, the global economy, the labor market and consumer spending, as well as an updated set of staff predictions and a reevaluation of the risks, according to the report.
