The central bank decided to hold the cash rate in July, taking into consideration the drop in inflation in May.
In his monetary policy statement, RBA Governor Philip Lowe said the 400 basis points increase in interest rates since May last year seemed to be working to establish a more sustainable balance between supply and demand in the economy.
“This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook,” he said.
Regarding inflation, Mr Lowe said the peak has already passed, with the monthly CPI indicator showing further declines in May.
“But inflation is still too high and will remain so for some time yet — high inflation makes life difficult for everyone and damages the functioning of the economy,” he said.
“It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.”
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
Given this, Mr Lowe said the RBA remains committed to prioritise returning inflation to target within a reasonable timeframe.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.
“The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks.”
CreditorWatch chief economist Anneke Thompson said at this stage, concerns remain about the very tight labour market and underlying inflation.
“Looking overseas, inflation in areas that are typically labour intensive is only decreasing very slowly, while price rises for goods are coming down faster — this is the same in Australia, where we recorded a decline of 0.4 per cent in the price of clothing and footwear,” she said.
For Ms Thompson, it appears the cycle is already at a point where further tightening in the monetary policy would have a limited effect.
“Households with a home loan have already endured the fastest and steepest rise to the cash rate in history, with most of these people unable to increase income enough to offset their higher interest repayments,” she said.
Meanwhile, Ms Thompson said the COVID-era savings will have been exhausted already by many Australians.
“Therefore, it is highly likely that households with a home loan, roughly 40% of Australian households when including investors, have already pulled back significantly on their discretionary spending,” she said.
“The RBA will now be hoping businesses slow their hiring intentions, taking some pressure off wages and reducing inflation in labour-intensive parts of the economy.”
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