Economy could slow more than the Reserve Bank expected, latest RBA minutes reveal

Bank left cash rate unchanged in July and meeting minutes state squeeze on households means consumption could slow ‘more sharply than implied by the current forecasts’

The Reserve Bank opted to leave the official interest rate unchanged at the July board meeting in part because gathering headwinds might mean the economy slows more than it expected.

While the nine-member board agreed “some further tightening of monetary policy may be required”, that would hinge on how inflation and the economy fared, according to minutes from the 4 July meeting released on Tuesday.

The 12 interest rate increases since May 2022 had already lifted the share of income taken up by mortgage interest repayments to a “historic peak” of 9.4% by May this year. That proportion would likely increase as a significant number of borrowers were yet to transition from low fixed rates to much higher variable ones.

Wage growth also remained well below the inflation rate, leaving real household incomes declining by 4% in the year to March. Higher taxation as people moved into higher tax brackets added to the drags deterring spending.

Board members “observed 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 minutes state. Higher interest rates might also nudge people to save more.

If the curbs on spending were to become too strong “demand for labour would slow and the unemployment rate would be likely to rise beyond the rate required to ensure inflation returns to target in a reasonable timeframe”, the minutes said.

Sharper-than-expected falls in inflation in some economies such as the US since the start of July have encouraged investors to pare predictions of futher interest rate hikes. Prior to this morning’s release of the minutes, markets were assessing the chance of another 25 basis-point increase in the cash rate to 4.35% as a one-in-four chance, according to the ASX’s rates tracker.

Ahead of the release of the RBA's minutes for its 4 July board meeting, investors were assessing the chance of an August 1st rate rise of another 25bp as about one in four. (Source: ASX)

— (@p_hannam) July 17, 2023

The ANZ has been among the banks ditching expectations for an August rate rise, forecasting an extended pause instead.

However, the outgoing RBA governor Philip Lowe – who has two board meetings to go until he is replaced by his deputy, Michele Bullock, on 18 September – has made it clear the bank would need to be confident that inflation remains on track to return to the 2% to 3% target band by mid-2025 before ending the spate of rate rises.

The RBA’s minutes show the board members weighed up lifting the cash rate at the July meeting in part because of the risk that mid-2025 timeframe “would be extended without further monetary policy tightening”. Rising rent and services were among the consumer price categories that typically showed “quite persistent” inflation.

The labour market, too, remained tight. Wage growth was forecast to come in at “around 4%” for the September quarter, for instance, after “larger than expected” award and minimum wage decisions by the Fair Work Commission.

The Australian Bureau of Statistics will release figures for jobs in June on Thursday. In May, the economy added a net of more than 70,000 positions, sending the jobless rate down to 3.6%, close to a half-century low.

Home prices, too, had started to reverse earlier falls, with Sydney prices up about 5% since February. “The turnaround in the housing market, if sustained, was expected to support household consumption and dwelling investment,” the minutes stated.

In summary, though, noting “both the uncertainty around the outlook and significant increase in interest rates to date, members agreed to hold the cash rate steady and reassess the situation at the August meeting,” the members said.

CBA’s senior economist, Belinda Allen, said her bank considers “the path of least regret for the RBA is one final rate hike in August given concerns over the time it could take for inflation to return to target as well as sticky core and services inflation”.

Apart from next week’s labour force numbers, June quarter consumer price index figures on 26 July and then June retail trade data two days later will be key for the RBA’s next move.

“A material undershoot of both CPI and labour force data increases the risk of another on hold decision,” Allen said.

Westpac’s chief economist, Bill Evans, said next month’s RBA decision would again hinge on how inflation, employment, household spending, the housing market and global trends develop.

“Westpac continues to expect that slow progress in reducing inflation, which is likely to be apparent in the June quarter inflation report, and ongoing tightness in the labour market, particularly as job vacancies remain historically elevated, will make the case for further tightening well justified, Evans said. “[A]s with previous meetings, the August decision will again be balanced.”


Peter Hannam

The GuardianTramp

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