RBA was in two minds over ‘finely balanced’ interest rate rise

The Reserve Bank of Australia (RBA) was in two minds over whether to raise interest rates this month, with minutes from the board's June meeting revealing the bank considered the arguments for and against a hike were "finely balanced".

The board weighed up two options in the meeting: leaving rates on hold or pushing them up by 25 basis points to 4.1 per cent.

They ended up opting for the latter, concluding there was a higher risk of inflation rising than was the case in May.

"Members recognised the strength of both sets of arguments, concluding that the arguments were finely balanced," the RBA minutes read.

"They judged, though, that the case to raise the cash rate at this meeting was the stronger one.

"The board affirmed that its priority is to return inflation to target within a reasonable timeframe.

"The recent data suggested that inflation risks had shifted somewhat to the upside.

"Given this shift and the already drawn-out return of inflation to target, the board judged that a further increase in interest rates was warranted.

"This increase would provide greater confidence that inflation would return to target over the period ahead."

The bank pointed the finger – at least in part – at large corporations which are using inflation as an excuse to further increase their prices.

"Some firms were indexing their prices, either implicitly or directly, to past inflation," the bank said.

"These developments created an increased risk that high inflation would be persistent, which would make it more difficult to keep the economy on the narrow path."

Despite settling on the rise, a case was made for pausing rates to avoid throttling the economy more than intended, acknowledging the bleak conditions many households find themselves in at the moment.

"The case for holding the cash rate unchanged … rested on the slowing in the economy and the possibility that the significant increases in interest rates to date would lead to the economy slowing more sharply than expected," the minutes state.

"Members noted that consumption growth was already quite weak, especially in per capita terms.

"Real disposable incomes were falling, especially for home loan borrowers, and many renters were experiencing difficult financial conditions."

The reasoning for the increase suggests the bank will consider a rates pause in June, however, it is clear the board members will prioritise getting inflation to 2-3 per cent above all else.

"Members acknowledged the considerable uncertainty regarding the outlook for household spending and the financial stresses facing some households," it said.

"Given this, they agreed to continue to monitor trends in household spending closely and consider the implications for the inflation outlook, as well as developments in the global economy and the domestic labour market.

"Members reaffirmed their determination to return inflation to target and their willingness to do what is necessary to achieve that."

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