Reserve Bank warns that inflation risks have shifted to upside after rate rise in June

Mortgage holders should prepare for more pain in coming months, after new Reserve Bank board minutes reveal it is worried inflation risks have increased.

RBA governor Philip Lowe said that inflation risks have shifted to the upside. Picture: NCA NewsWire / Christian Gilles

Mortgage holders should prepare for more pain in coming months, after new Reserve Bank board minutes revealed it is worried that inflation risks have increased and will take longer to return to target.

The RBA on June 6 surprised investors and most economists by lifting its cash rate target from 3.85 per cent to 4.1 per cent.

The minutes from that board meeting showed members debated the cases for a pause versus a hike, including several argumentsin favour of an 12th increase in 14 months.

The central bank forecasts consumer price growth would remain higher for longer and would only from its current 7 per cent reading to within its 2-3 per cent target range by mid-2025.

According to the RBA minutes, the decision to lift rates by 25 basis points to a decade high of 4.1 per cent this month was “finely balanced” between arguments to keep rates on hold or hike by 25bps again that were considered at the meeting.

The case for hiking focused on the increased risk that inflation would take longer to return to target than had been expected.

Board members observed that inflation was already projected to be above target for a number of years and was expected to take somewhat longer to return to target in Australia than in some other countries.

It said that there “were significant risks and uncertainties” facing Australia as it tried to traverse a narrow path on which inflation comes back to target while the unemployment rate rises but remains low.

“Members noted that inflation had passed its peak but remained well above target and was forecast to return to the top of the target range only by mid-2025,” the minutes said.

“There was little spare capacity in the economy, with the unemployment rate very low. At the same time, members noted that consumer spending had softened significantly, with both higher interest rates and high inflation weighing on household purchasing power.”

RBA board members also discussed how higher wages could impact inflation.

“Similarly, members observed that some firms were indexing their prices, either implicitly or directly, to past inflation. These developments created an increased risk that high inflation would be persistent, which would make it more difficult to keep the economy on the narrow path,” the minutes said.

Markets have priced in a greater than 50 per cent chance of a rate rise with the RBA meets on July 4.

RBA governor Philip Lowe warned earlier this month that inflation would be difficult to manage if all workers received a pay rise after the Fair Work Commission opted to deliver the biggest minimum wage hike on record.

The minutes showed that the board observed that the resumption of growth in housing prices would — if sustained — imply less drag on consumer spending in the coming year than had been envisaged.

“Members also noted that the stabilisation in housing loan approvals suggested that financial conditions may not have been as tight as they had previously judged. The downside risks to global growth had also abated a little as conditions in the US banking sector had stabilised.”

Economists have revised their expectations for interest rates in the wake off hawkish comments made by Dr Lowe this month and a surprise volume in the number of jobs added in May. Westpac and NAB have forecasted for interest rates to peak at 4.6 per cent with 25 basis point rises for July and August.