Inflation pressures and weak productivity keep door open to further tightening
The Reserve Bank of Australia (RBA) has signalled it remains prepared to raise the cash rate again this year, adding to budget pressure for mortgage holders.
Minutes from the RBA's June meeting, released on Tuesday, described the decision to maintain the cash rate at 4.35% as a cautious hold, with inflation still sitting outside the central bank's 2-3% target band and unemployment remaining relatively low.
The minutes indicate the RBA is willing to lift rates further if needed to return inflation to target.
"The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome, including increasing the cash rate target if necessary," the RBA's minutes read.
The hold follows three consecutive rate increases earlier in the year, driven by inflationary pressure linked to the Iran war, elevated government spending and weak productivity growth.
The board noted there was value in pausing to assess the impact of previous rate rises, particularly given the disruption caused by the oil crisis.
"Members judged that there was merit in using the space provided by the board's earlier decisions to raise the cash rate target to assess how the economy was adjusting and the impact of disruptions to oil supply," the minutes read.
Weak productivity remained a concern for the central bank. Productivity, which measures GDP against hours worked, fell 0.6% in the March quarter. Combined with steady wages growth, this raised concerns about ongoing inflationary pressure.
"Measures of average earnings from the national accounts had been a little softer than anticipated, but weak productivity growth meant that growth in unit labour costs remained above its average over the inflation-targeting period," the RBA said.
Following the June rate hold, RBA governor Michele Bullock (pictured right) said inflation remained "too high" and warned that further increases could be necessary should inflation expectations become entrenched.
"If expectations of higher cost growth get embedded into price and wage setting decisions across the economy, this would lead to even higher and more persistent inflation, and it would require even more tightening in monetary policy to get inflation under control," she said.
"(The rate hold) decision does not rule out further tightening in monetary policy if that is what is required to bring inflation down."
May inflation figures showed annual headline inflation at 4%, while trimmed mean inflation rose to 3.6%.
The three rate increases recorded since the start of the year have added $272 a month to repayments for a household with a $600,000 mortgage on a 25-year term.
Commonwealth Bank of Australia, ANZ and NAB each expect rates to remain on hold for the remainder of the year, forecasting cuts in 2027. Westpac, by contrast, anticipates two further increases in 2026, followed by two cuts in 2027.
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