Australia’s central bank paused as policy is clearly tight and puts growth at risk

SYDNEY – Australia’s central bank decided to hold interest rates steady this month as policy was clearly tight and there was a risk that a tightening in household finances could lead to a sharp recession and higher unemployment.

However, the bank held out a warning that some adjustments may still be required to control inflation, wary that the broader effects on inflation of higher rents, weak productivity and higher electricity prices are not reflected. have fully captured.

Minutes from Tuesday’s July 4 policy meeting showed the Reserve Bank of Australia (RBA) board considered raising the cash rate by 25 basis points to 4.35 percent, before deciding to pause, acknowledging that both sets of arguments were sound.

“Given both the uncertainty surrounding the outlook and the significant rise in interest rates to date, members agreed to keep cash stable and reassess the situation at the August meeting,” the minutes showed.

The monetary policy stance was already tight and is expected to tighten further due to major low fixed rate lending restarts ahead. Mortgage interest payments already represented a record share of household disposable income in May.

The RBA this month left interest rates unchanged at 4.1 percent, providing the second pause since May last year when it began raising interest rates by 400 basis points in just 14 months.

READ: Australia’s central bank is holding rates, says more hikes may be required

Markets are leaning towards an RBA pause in August, although they have fully priced in a quarter point interest rate hike by the end of the year.

The minutes noted that a pullback in inflation, with a monthly reading showing gains in consumer prices slowed to a 13-month low of 5.6 percent in May, would help mitigate the risk of a rise in inflation expectations in the medium term.

READ: Australia consumer inflation hits 13-month low, adding to rate pause case

There is also a risk that economic growth will slow more than expected, with the board mindful of the possibility that the unemployment rate is likely to rise beyond the rate required to reduce inflation, which was forecast to be around 4, 5 percent.

“Members noted that there was considerable uncertainty about the resilience of household consumption, and that tightening the finances of many households could lead to a steeper slowdown in consumption than current forecasts imply.”

The board agreed to reassess the situation in August, pending additional data on inflation, the global economy, the labor market and household spending, as well as an updated set of staff forecasts and a revised risk assessment.

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