The decision by the Reserve Bank of Australia (RBA) to leave interest rates unchanged in August stemmed from slowing economic growth that's alleviating inflationary pressures.
According to the minutes from the RBA's August meeting, released today, while it again left the cash rate unchanged at 4.10%, the board did contemplate a 25 basis points increase to 4.35%. That would have marked the 13th rate rise since it began tightening monetary policy in May 2022.
Instead, the decision was made to grant more time to assess domestic and international economic trends, leading to the second consecutive month of paused rate increases.
The board highlighted “a diversity of experience” among individual households as inflation and higher borrowing costs worked their way through the economy. It recognised the “acute financial challenges” facing many households with considerably weaker consumption outcomes for some mortgagors and renters.
The RBA minutes showed that while the economy was expected to grow only slowly over the period ahead, which would help with the further moderation of inflation, it was possible that some further tightening might be required to ensure that inflation returned to its 2%-3% by target in a reasonable timeframe.
The RBA's August meeting followed the unveiling of the June quarter's consumer inflation data that revealed prices had increased at an annual rate of 6%, a tad below expectations.
On a quarterly basis, price hikes came in at 0.8%, which matched the growth in wages over the June quarter, as also reported today by the Australian Bureau of Statistics (ABS).
Annually, wages rose by 3.6%, a figure that remains near the highest levels seen in more than a decade. Wage rises were higher than in the same period last year, as cost of living and labour market pressures were considered in organisations’ salary reviews.
However, that growth rate was lower than most economists, including those at the Reserve Bank, were expecting.
One factor that caught the board's attention was the fall in real household income. It suggests that this drop, which resulted from prices surging faster than wages on an annual basis, might propel a swifter inflation decrease than initially expected.
However, high June-quarter service price inflation was one of the factors that might prevent inflation from aligning with the RBA's target range by mid-2025.
The RBA also noted that if the stagnant productivity growth of the past three years persisted, or if wage growth responded more sensitively to the tight labour market, it could be challenging to achieve the target inflation rate.
The minutes showed that international influences on Australia were mixed, with North American economic data showing promising growth, while Australia's most significant export market, China, presents uncertainties.
China’s weaker than anticipated recovery from Covid lockdowns has seen growth estimates revised down in the past three months to well below pre-pandemic levels.