RBA June board meeting minutes released, showing cash rate could hike again

Australian homeowners could soon be slugged with another interest rate hike, with the latest minutes from the Reserve Bank of Australia revealing the board is ready to raise rates if “inflation expectations” change.

The discussion, held on June 17 and 18, shows the board, led by RBA Governor Michele Bullock, hold persistent fears about rising prices and the challenge to bring inflation back to its target band of 2-3 per cent.

“Members acknowledged that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target, with adverse implications for growth in output and employment,” the minutes show.

Those expectations of rising inflation hit Australia just days later on June 26, when the ABS reported the monthly consumer price index had jumped to 4 per cent in the year to May, up from 3.6 per cent in April.

Economists had expected a more modest increase of 3.8 per cent.

The RBA held rates steady at 4.35 per cent in June, but reiterated it would be ready to hike them if necessary.

“Raising the cash rate at this meeting could be appropriate if members formed the view that policy settings were not sufficiently restrictive to return inflation to target within a reasonable time frame,” the minutes state.

“This could be the case if it was judged that inflation was returning to target more slowly than previously assumed or that the gap between aggregate demand and aggregate supply was not closing quickly enough.”

Elsewhere, the Board noted new “pieces of information” from May indicated “a need to remain alert to upside risks to inflation”.

“There had been further evidence that global growth had troughed in late 2023 and was gradually picking up, while disinflation had slowed in several countries,” the minutes state.

“In Australia, inflation had also been higher than expected in April.

“And the revisions to historical estimates of consumer spending meant that consumption growth, while still weak, had been more resilient than previously assessed.

The Board also said a “gradual strengthening of the global economic cycle” would also support demand in Australia.

“Financial conditions for businesses appeared to have eased a little over preceding months for some larger businesses,” the minutes state.

“Collectively, these developments could limit the extent to which current policy settings were sufficient to bring aggregate demand back into line with aggregate supply.

“Moreover, recent inflation data, both domestically and from abroad, suggested some upside risk to the May forecast profile, since inflation was taking longer to abate than had previously been assumed.”

Deutsche Group chief economist for Australia Phil O’Donaghoe said the June 26 CPI print would likely push the Reserve Bank of Australia to hike rates in August by 25 bps to 4.6 per cent.

“Underlying inflation is intolerably high in Australia,” he said.

“In fact, Australia is the only G10 country where underlying inflation has increased since December.

“The scale of that acceleration is material. Trimmed mean inflation, the RBA’s preferred measure of inflation, stood at 4.4 per cent year-on-year in May up 0.4 points since December.

“In contrast, every other G10 country has seen a deceleration in underlying inflation since December and the average decline is 0.9 points.

“Unless there is a stunning reversal in underlying inflation pressures in the month of June, we think that another material beat on the RBA’s near-term forecasts for trimmed mean inflation is looking very likely.

“That should prompt a rate hike.”

IG analyst Tony Sycamore said the rates market had now priced in the chance of an August hike at 35 per cent chance.