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The Reserve Bank board left official interest rates on hold a fortnight ago on fears that more hikes could trigger an unanticipated spike in unemployment by the end of the year.
Key points:
- Treasurer Jim Chalmers and RBA governor Philip Lowe are in India for the G20 meeting of finance ministers
- Board minutes show concerns about surging unemployment stayed the RBA's hand on rates this month
- Mr Lowe says living standards will fall if productivity doesn't improve
Minutes from the RBA board's meeting on July 4 show concerns that higher interest rates would force households to save more and most likely negatively affect a so-far resilient jobs market.
"Members observed there was considerable uncertainty about the resilience of household consumption," the minutes noted.
"The squeeze of many households' finances would … encourage households to save more which would affect consumption.
"If that were to occur, the demand for labour would slow and the unemployment rate would be likely to rise beyond the rate required to ensure inflation returns to target."
The current jobless rate of 3.6 per cent seasonally adjusted is widely expected to remain steady when monthly figures for June are released on Thursday.
However, some economists see unemployment ticking higher to 3.7 per cent as the lagging impact of 12 rate rises since May last year begins to hit the economy.
The RBA itself is expecting unemployment to ultimately rise to around 4.5 per cent by the time inflation comes back within the target band in mid-2025, but some economists expect the jobless rate to rise more quickly.
Cases for and against another rate rise
The RBA board left the cash rate steady at its July 4 meeting, warning that despite still-high inflation it needed a breather to assess the impact.
The minutes show that, despite signs of inflation gradually easing, measures of underlying inflation remained high in May at 6.4 per cent.
The board resolved to "reassess the situation" in August, after the next detail quarterly inflation numbers, while agreeing that "some further tightening" might be required to bring inflation to the 2 to 3 per cent target within a reasonable time frame.
However, the board repeated the commitment to "do what is necessary" to take inflation lower.
The case to increase the cash rate was based on concerns that inflation could remain elevated for "an extended period" and the risk of inflation becoming entrenched through expectations of rising prices without more tightening.
Other reasons to press the rates button included a tight labour market and signs that the housing market was stabilising, with prices rising again.
However, the minutes also highlighted concerns that mortgage payments now account for 9.4 per cent of disposable household income.
In addition to signs of a slowing economy, the minutes flagged worries that the likelihood of an El Niño weather event could push food prices higher over the coming year.
The meeting on July 4 was the final gathering of the Reserve Bank board before Philip Lowe learned he would not have his term renewed for a second term.
Lowe and Chalmers on productivity drive
The treasurer and outgoing Reserve Bank governor have presented a united front on the urgent need for productivity reform to grow the economy without stoking inflation.
Speaking at the start of the G20 meeting of finance ministers and central bank governors in India, Treasurer Jim Chalmers and RBA governor Philip Lowe were singing off the same hymn sheet.
"Our labour markets have proven quite resilient but there are still risks everywhere, and we're still expecting very weak growth in a number of our economies," Mr Chalmers warned.
"We need to increasingly focus our coordinated efforts on how we make our economies much more productive, and that goes to some of the issues that we need to talk about in this meeting: the energy transformation, how we adapt and adopt technology, and how we get the human capital piece right."
The man who Mr Chalmers only last Friday announced was about to lose his job as RBA governor, Mr Lowe, was even more urgent in his warning about the need for reform.
"The reality that most of us face is that productivity growth has slowed down in most of our economies. That means it's a real problem," Mr Lowe observed.
"It means lower sustainable growth in real wages, it means a limited increase in output as well.
"It means a slower expansion in the public services we want for our society and it means an increased tension in the distribution of income."
And Mr Lowe placed the responsibility squarely on Mr Chalmers, and other political leaders from around the world.
"The good news is there are a lot of sensible ideas about how we can do this," the outgoing RBA boss said.
"But another reality we face is the challenge here is a political one. It's not about not knowing what to do, it's a political one.
"And the political challenge is to get these good ideas that are already out there, through our political systems.
"If we don't do that, then we are condemning our citizens to slower growth in real wages, smaller public services and an increased tension on income distribution."
Mr Chalmers said he accepted that challenge.
"We need to be more ambitious than to just catch up and patch up and go back to the sorts of economies that we had before COVID-19," the treasurer said.
Given that many of the "good ideas" Mr Lowe talks about threaten the financial position of powerful vested interests, walking the walk will be far more challenging for politicians around the world than talking the talk.