Mortgage costs weighed on RBA’s cash rate decision

The Reserve Bank of Australia (RBA) has released the minutes of the board’s monetary policy meeting from 7 July revealing that the board discussed two options for monetary policy at this meeting, before deciding to leave the cash rate unchanged at 4.1 per cent.

The RBA acknowledged that inflation remained stubbornly high, despite a slight decline in May’s monthly figures to 5.6 per cent.

However, they also noted that consumer spending had weakened during the first half of 2023, attributed to the impact of surging inflation and rising interest rates on households’ real disposable incomes.

As such, the tightening of monetary policy was gradually making its way through the economy, especially as fixed-rate loans approached maturity.

While the previous month had seen a cash rate hike, taking the cash rate to 4.1 per cent, in response to inflation risks leaning towards the upside, the July meeting reiterated that the economy had little “spare capacity”, with high levels of economic activity and concerns surrounding services price inflation.

The board noted future risks of further rate increases loomed on the horizon, with inflation not expected to return to the target range until mid-2025.

In addition, the board expressed concerns over weak productivity contributing to rising unit labour costs and the unemployment rate had “surprised on the upside” declining to 3.6 per cent.

RBA decided to hold

Despite these challenges, the RBA ultimately chose to hold the cash rate, primarily influenced by future economic uncertainties.

The board recognised that monetary policy had been tightened significantly and rapidly over the past year, leading to a restrictive stance at the current cash rate.

Furthermore, the burden of mortgage interest payments had reached a “record high in May”, which could rise even without further cash rate increases, especially as fixed-rate loans matured.

As such, the full impact of the prior year’s policy tightening had not been fully realised and the board acknowledged the time it takes for households and businesses to adjust their spending and investment plans.

Members also acknowledged that inflation was now declining and the slowing in economic growth was working to bring demand and supply into closer alignment, which, over time, would work to lower inflation.

However, RBA added there remained “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.

Looking forward, the RBA acknowledged the possibility of some further tightening of monetary policy to bring inflation back to the target range within a reasonable time frame.

However, this decision would depend on how the economy and inflation evolved.

The next monetary policy meeting on 1 August will have the benefit of additional data on inflation, the global economy, the labour market, and household spending as well as an updated set of staff forecasts and a revised assessment of the risks.

Looking overseas, the board observed the policy rate in Australia “was still lower than in many comparable economies” and the recent experience of those countries highlighted the upside risks to inflation and the outlook for interest rates.

Economists split on August pause

The major bank’s economists have mixed views on whether the central bank will bump the cash rate in August.

The Commonwealth Bank (CBA) has called one final rate hike at the August board meeting, taking the cash rate to 4.35 per cent, while Westpac remains of the view that the August decision will be “balanced”, with a peak of 4.6 per cent, alongside National Australia Bank (NAB), however, ANZ economists have called for an extended pause at 4.1 per cent.

[Related: Major bank cash rate peak is 4.6 per cent]