The minutes of the RBA’s June meeting revealed that the Bank’s tightening bias remains intact.

The Board noted that there were a number of factors that supported the case for a rate hike last month.

First, the Q1 national accounts data incorporated significant upward revisions to private consumption and concomitant downward revisions to the savings rate. That could signal that households “were not being as cautious in their spending as previously thought.”

Second, credit growth to businesses remained above its pre-GFC average, which could slow the pace at which aggregate demand fell back into line with aggregate supply. Capacity pressures could be even higher than assumed if weak productivity growth hindered improvements on the supply side.

Third, the increase in the market-implied risk premium suggested a high risk of an increase in inflation expectations.

However, the Board ultimately judged that the case to leave rates on hold was the stronger one. 

For one thing, it remarked that it was important not to put too much weight on upward revisions to household consumption, given that they driven largely by travel imports. The Bank also remarked that the low savings rate could well indicate that households were “even more financially squeezed than previously assessed.”

For another, the Board judged that risks to the labour market were tilted to the downside. It noted that the adjustment in the labour market was evident in the rise in the unemployment rate, the fall in working hours and the decline in job vacancies. Moreover, the unemployment rate could rise relatively quickly, as had occurred in the past.

Lastly, it noted that although the business failure rate was not particularly high at present, “a continuation of the rapid rise in insolvencies over coming months would have adverse implications for labour demand.”

Overall, the Board conveyed its view that although inflation risks had risen since May, there was not sufficient information to change the Bank’s assessment that inflation would return to target by 2026. 

Admittedly, there is a risk that an upside surprise in the Q2 data prompts the Bank to change that assessment and deliver a rate hike.

However, we suspect that concerns about the economy and the labour market will continue to dominate.

The other side of that coin though, is that it will likely take the Bank longer to gain confidence that it has tamed inflation for good.

Accordingly, we don’t expect rate cuts before Q2 2025.