Reserve Bank of Australia: Minutes of June 16 meeting reveal why cash rate left on hold at 4.35 per cent

The Reserve Bank would be reluctant to cut interest rates anytime soon despite a slowdown in Australia’s economic growth and the housing market because it is worried about the Middle East conflict pushing up consumer prices and wages.

The cash rate was this month left on hold at 4.35 per cent for the first time since 2025, but the minutes of that June 16 meeting have revealed the RBA’s nine monetary policy board members were concerned about inflation remaining above its 2-3 per cent target for a sustained period.

“Against that backdrop, members agreed that monetary policy needed to remain restrictive to unwind current excess demand through a period of below-trend growth,” the minutes released on Tuesday said.

The Reserve Bank’s three rate hikes in February, March and May were already slowing the housing market in tandem with the Federal Government’s Budget changes to negative gearing and capital gains tax concessions on investment properties.

“Members noted that conditions in the housing market had eased by more than expected, reflecting the recent increases in the cash rate, tax changes announced in the Australian Government Budget and the broader economic environment,” the minutes said.

While headline inflation moderated to 4 per cent in May, it was above the RBA’s target for the 10th straight month.

A resolution of the Middle East conflict is far from assured, with the minutes noting this would affect underlying inflation which looks through volatile price movements.

“It was still likely that underlying inflation would increase to some extent in response to recent fuel supply disruptions,” it said.

“Members noted the potential for sustained high oil prices to feed through more fully into price- and wage-setting behaviour, even if fuel prices subsequently abate.

“These considerations led members to assess that the Middle East conflict still posed material upside risks for inflation and downside risks for growth.”

The Reserve Bank’s monetary policy board cited their May forecasts that “envisaged that it would be a further two years before inflation returned sustainably to target”.

Inflation was expected to remain at elevated levels despite historically weak consumer sentiment readings.

“Weak consumer sentiment does not necessarily signal future weakness in consumption,” the minutes said.

The RBA also looked through the four-year high jobless rate of 4.5 per cent in April, before new data showed unemployment easing to 4.4 per cent in May.

“On balance, the staff assessed that labour market conditions were a little weaker than had been expected in May but cautioned against reading too much into monthly data outcomes, which can be volatile,” it said.

The Reserve Bank’s monetary policy board, however, was divided about whether a 4.75 per cent increase in the minimum wage and modern awards, coming into effect on July 1, would flow through across the labour market.

“Views differed on the extent to which the outcome might indirectly influence other wage negotiations, but members agreed that this would depend in part on the tightness of the labour market and expectations for inflation,” the minutes said.

It also noted the neutral cash rate level - where monetary policy was neither seeking to stimulate nor slow the economy - would be higher than the existing 4.35 per cent cash rate as the construction of new data centres to power AI, the renewable energy transition and defence spending added to overall demand

“Members observed that estimates of the real neutral rate had risen over preceding years – consistent with a global trend, which probably reflected factors such as increased investment in the energy transition, defence and, more recently, data centres – and were a little higher than when the cash rate target was previously at its current level,” the minutes said.

“Members nevertheless emphasised that assessments of the neutral rate are inherently uncertain and do not provide a direct guide for monetary policy.”

Nonetheless, the RBA’s monetary policy board didn’t discuss raising the cash rate at its most recent meeting, despite governor Michele Bullock warning at her June 16 media conference rates would have to go up if inflation rose.

Australia’s big four banks - Commonwealth, ANZ, NAB and Westpac - are all expecting rate cuts in 2027, but Westpac still sees two more hikes in August and September that would take the RBA cash rate to an 18-year high of 4.85 per cent.

ANZ head of Australian economics Adam Boyton said a rate rise was still a risk, but it still expecting the RBA to remain on hold.

“The minutes underscore the board’s hawkishness and hence the risk of a further rate hike,” he said.

But NAB senior economist Taylor Nugent said slower economic growth was a bigger concern than elevated inflation.

“The minutes are consistent with the view the balance of risks had been shifting a bit, away from upside risk to (already elevated) inflation, and towards downside risk to growth,” he said.

The interbank lending futures market is no longer expecting any more rate hikes in 2026 and is forecasting relief in 2027, which the RBA minutes noted.

“Some market economists expected the cash rate to be increased again in 2026 because of ongoing inflationary pressures from both domestic and international factors,” the minutes said.

“Others expected monetary policy to remain on hold in 2026 and then to be eased from around mid-2027, given restrictive financial conditions currently, signs of a slowing in aggregate demand and an anticipated decline in inflation.”

While Westpac is forecasting an August rate hike that would take the RBA cash rate to a 15-year high of 4.6 per cent, the futures market is only regarding an increase at the next meeting as a 19 per cent chance.