All eyes are on the Reserve Bank’s August meeting, after minutes from its last interest rate decision revealed returning inflation to target was the bank’s “highest priority” following a series of shock rises.
While the RBA considered hiking rates beyond 4.35 per cent in June, the board ultimately elected to leave them on hold as it awaits more comprehensive economic data and tries to maintain gains in the employment market.
However, unexpectedly high monthly inflation figures from March and April have heaped pressure on the bank, leading markets to price in a 40 per cent chance of hike on August 6.
A further rise would likely come as a brutal blow for many households, with analysis suggesting some could be left more than $1,000 a year worse off.
Speculation about the chance of another hike is likely to escalate further on Tuesday, as minutes from the RBA’s last meeting revealed concerns inflation could be “returning to target more slowly than previously assumed.”
Although the board noted that the “gap was closing” between aggregate demand and supply, inflation expectations remained a risk and the RBA suggested “significantly higher interest rates” would be required to bring prices under control if there was a material increase.
An upward revision in consumer spending was also a concern, suggesting “households were not being as cautious” as previously believed – although the board cautioned it could not be certain this was the case.
While the RBA acknowledged energy rebates and rental assistance from state and federal government’s would act to reduce headline inflation, it noted the fall would be reversed in 2025.
Economists have also warned the handouts could ultimately prove inflationary by increasing the amount of aggregate demand in the economy, but the board said it would not incorporate an “assessment of the impact” until it released its August forecasts.
That is likely to put yet more weight behind inflation data from the June quarter, with economists warning that if figures again come in above expectations it could all but force the RBA’s hand.
In its June minutes, the bank’s board acknowledged a hike last month would have been appropriate if monetary conditions were not “sufficiently restrictive to return inflation to target within a reasonable timeframe.”
“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,” the wrote.
Pointedly, the RBA also acknowledged other central banks had concluded that allowing unemployment to tick higher was the most appropriate way to bring inflation back to target “within a reasonable timeframe.”
However, the bank, which has come under pressure from the Albanese government to ensure significant gains in the job market are maintained, has repeatedly argued it was possible to bring down inflation without a major increase in unemployment and reiterated that stance on Tuesday.
“This was not the approach that had been adopted by the Board,” they said, referencing decisions made overseas.