The minutes from the June Reserve Bank of Australia (RBA) meeting published last week revealed a more hotly contested meeting than the market anticipated, with the decision closely split between a hold or a 25 basis point hike. ​The threat of further inflation outweighing the option to hold.​

The RBA has the challenge of navigating a narrow path to avoid recession when making their monetary policy decisions each month. The main tension point in the economy comes with inflation remaining high, whilst employment is very strong. Whilst employment remains strong, it is harder for monetary policy to get the required cut through on inflation. ​​

The environment with a low level of unemployment, is increasing pressure on wages and prices. As such, the currently tight labour market is putting pressure on businesses to increase wages in order to maintain and secure talent. Businesses are looking to pass these cost pressures on to the consumer via higher prices of goods and services, exacerbating the inflation issue. This becomes a vicious cycle;​

• the RBA increases interest rates attempting to rein in spending to reduce prices and therefore inflation;​
• households demand wage increases to offset the rising cost of living and increasing borrowing rates determined by the RBA cash rate; and​
• businesses offer competitive wages to attract employees but pass on these costs through higher prices of goods and services. ​

One proposed fix is to increase the levels of skilled migration to put pressure on the labour market, something the current government doesn’t seem keen on.​

With that being said, the RBA has noted that their aim of bringing inflation back to target is a slower approach when compared to other central banks. The extended timeframe reflects the RBA’s attempt to bring inflation back down, whilst also trying to preserve the gains in employment that have been achieved thus far. The meeting minutes affirmed that the RBA’s priority is to return inflation to target, within a reasonable timeframe. ​

There is the potential for inflation to remain higher for longer if the RBA’s decisions do not have the desired effect. If inflation stays higher for longer, the RBA would be forced to raise rates even further and maintain them at a higher level for longer. The one benefit the government will get out of this inflationary period is an effective devaluation of the debt taken on during the COVID period. ​

The monthly CPI data is released this week and will be significant for the RBA’s next monetary policy decision. The CPI data will need to show further signs of easing, particularly in the services sector, for the RBA to consider a pause. ​