SYDNEY — The prospect of a further interest-rate increase by the Reserve Bank of Australia as early as August remains high, with minutes of the central bank’s July 4 policy meeting warning that even tighter policy settings may be required to bring down inflation.
The RBA left the official cash rate on hold at 4.10% at the policy meeting, but kept open the possibility for further hikes, with the release of second-quarter inflation data at the end of this month critical to the decision.
The inflation data will also underpin a reassessment of the RBA’s economic forecasts, which currently predict that inflation will return to the 2% to 3% target band by mid-2025. Any sense that the expected path to getting inflation down will be delayed is likely to trigger further interest-rate rises.
“Members agreed that some further tightening of monetary policy may be required to bring inflation back to target within a reasonable timeframe, but that this depended on how the economy and inflation evolve,” according to the minutes published Tuesday.
The RBA has raised the OCR by a record 400 basis points since May last year, which has added massively to mortgage repayments, cooled inflation, and slowed the economy. But the central bank remains cautious about the outlook because inflation remains too high against a backdrop of rising pressures for higher wages, which may yet entrench elevated inflationary expectations.
The policy-setting board of the RBA considered arguments to raise interest rates, and to keep interest rate on hold, choosing the latter.
Arguments in support of the on-hold decision centered on the view that monetary policy had been tightened considerably over the prior year and the policy stance was “clearly restrictive.”
The case to increase the OCR was built around concerns that inflation may turn out to be stickier than thought, with several categories of the consumer price index, including rents and services prices, remaining worrisome.
The RBA board also observed that inflation in advanced economies was proving to be more resilient than expected and that other central banks were still inclined to raise interest rates.
With inflation pressures considerable in major economies, the RBA is conscious of the fact that official interest rates in Australia are lower than most other comparable economies, which implies a potential need to continue raising interest rates.