RBA Maintains Cash Rate at 4.35% with Potential for Further Increases

RBA maintains cash rate at June level as expected, signals potential for additional hikes.

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 4.35% during its June meeting, as anticipated, while adopting a more assertive stance regarding future rate adjustments. Governor Bullock reiterated in the post-meeting briefing that further increases remain a possibility if economic conditions warrant.

The central bank’s decision to include the phrase “including increasing the cash rate target further if required” in its official statement represented a deliberate shift in communication. This emphasis on potential hikes counters recent market speculation that the RBA had concluded its rate-raising cycle. The Deputy Governor’s public reinforcement of this message during the media conference underscored the board’s commitment to addressing inflationary pressures.

Our analysis maintains that additional rate hikes are likely. A strong June quarter trimmed mean inflation reading could trigger an August increase. While a temporary pause is possible if subsequent inflation data weakens, the prevailing outlook points to continued upward movement unless there is a notable economic slowdown combined with improved inflation forecasts.

The RBA reiterated its assessment that inflation remains elevated and that a period of subdued growth is necessary to return it to target levels. The board continues to frame the economy as constrained by capacity limits, projecting growth of approximately 2% annually before inflation reaccelerates – a narrower range than our own projections.

Contrary to market expectations, the RBA has not shown heightened concern over recent domestic labor market data. The central bank’s growth projections, which anticipated one or two rate hikes, already incorporated an expected economic slowdown. The Governor acknowledged in the briefing that the current unemployment rate still reflects a tight labor market.

The energy price shock is identified as a persistent contributor to inflation. Energy and related commodity prices remain above pre-conflict levels, with the gradual resolution of the conflict anticipated to have a measured impact on price pressures, aligning with our Market Outlook projections.

The board’s analysis of real economic conditions remained optimistic. Declines in consumer spending were described as anticipated, and assessments of the housing market showed no immediate alarm. Labor market indicators were characterized as resilient. In the briefing, the Governor emphasized the need for further observation on how recent policy measures, including rate adjustments and budgetary changes, might affect housing dynamics.

The commentary on cost pass-through by businesses has become more explicit. While the May statement noted “early signs” of firms transferring higher costs to consumers, the June statement described this as “signs – and in some cases, actual occurrences – particularly in new housing construction.” The Governor further clarified that such pass-through is contingent on strong demand, noting that small businesses, for whom this is critical to their operations, are likely to pass on costs more readily than in prior periods.

In summary, the RBA’s June meeting conveyed consistent messaging with our prior assessments. The board remains focused on mitigating upside inflation risks rather than downside economic concerns. The increased observable cost pass-through, especially in housing, aligns with our earlier observations from April, reinforcing the case for further tightening if inflationary pressures persist.

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