Terrifying risk in rate rise crisis

Minutes from the RBA’s July meeting reveals while the board agreed “some further tightening of monetary policy may be required” in the months ahead to bring inflation under control, more data on inflation and the economy was needed to ensure the central bank didn’t go too far.

At the meeting, the board had flirted with the idea of raising rates by 25 basis points, but agreed the case for holding them steady was “stronger”, the minutes show.

The board concluded that the full effect of 12 rate hikes since last May had yet to be felt by Australians and there was a risk output growth could slow by “more than expected”, triggering a potentially catastrophic set of events.

“The slowing in economic activity in general, and consumption in particular, had been consistent with what could reasonably have been expected given trends in household income and wealth,” the minutes state.

“However, members observed that 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.

“Higher interest rates could also be expected to encourage households to save more, which would affect consumption.

“If that were to occur, the 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 time frame.”

The board said mortgage payments had already increased to a “historical peak” of 9.4 per cent of household income.

The board discussed wage growth, which remained well below the inflation rate – meaning real household incomes had declined by a whopping four per cent in the year to March.

In exploring the case for increasing the rate, the board said inflation was forecast to remain above target for an extended period, and “there was a risk that this time frame would be extended without further monetary policy tightening”.

The board said rising rent and services were among the consumer price categories that were exhibiting “quite persistent” inflation.

Members commented on the “very tight” labour market, and said despite an apparent stabilisation of nominal wages growth, the environment would “remain conducive to above-average increases in prices and wages under such levels of labour market tightness”.

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

Ultimately, the board judged the case to hold the cash rate steady was “the stronger one”.

“Noting both the uncertainty around the outlook and the significant increase in interest rates to date, members agreed to hold the cash rate steady and reassess the situation at the August meeting,” the minutes say.

“Members agreed some further tightening of monetary policy may be required to bring inflation back to target within a reasonable time frame, but that this depended on how the economy and inflation evolve.”

The meeting was the last one before it was announced Philip Lowe would be replaced by Deputy Governor Michele Bullock in the top job from September.

Originally published as RBA minutes reveal board almost hiked rates, warning issued about economy growth