The Reserve Bank of Australia’s Monetary Policy Board debated raising interest rates by 25 basis points at its August meeting before unanimously deciding to hold the cash rate at 4.35%, minutes released on Monday revealed. The split underscores the central bank’s struggle to balance persistent inflation pressures against signs that tighter policy is beginning to slow the economy.
Inflation Remains the Core Concern
The board noted that headline inflation remained “elevated” in the June quarter, driven in part by higher energy costs stemming from the ongoing Middle East conflict and Strait of Hormuz disruptions. Trimmed mean inflation, the RBA’s preferred underlying gauge, showed little improvement from the March quarter, suggesting price pressures have become more entrenched than initially expected.
Housing costs continued to be the largest single contributor to annual inflation, rising 6.5% year-on-year, while electricity costs surged 21.1% as government rebates expired. The RBA flagged that even core inflation, which strips out volatile items, remained stubbornly above the bank’s 2-3% target band.
Economy Cooling but Not Enough
On the other side of the ledger, the board acknowledged that higher interest rates are starting to bite. Housing conditions weakened more than the bank expected in May, reflecting the cumulative impact of rate rises, softer sentiment, and federal Budget tax changes. Mortgage repayments have climbed back near their 2024 peak as earlier tightening flows through to borrowers.
Labor market conditions have also eased slightly more than anticipated in recent months, though leading indicators suggest only limited further softening ahead. The board judged the economy was still operating with capacity constraints, with weak productivity growth limiting supply-side expansion.
Geopolitical and AI Risks Loom Large
The minutes highlighted heightened uncertainty around both growth and inflation, with the board specifically citing the risk that prolonged disruptions to global oil supply or an extended Middle East conflict could produce both higher inflation and weaker economic activity than currently forecast.
In an unusual intervention, the RBA also flagged the global boom in artificial intelligence and data centre investment as a potential inflation risk. While AI-related spending has boosted growth in some Asian economies and contributed to stronger Australian business investment, the board warned that an even larger investment wave could add to demand and price pressures both domestically and globally.
The board reiterated that it remains prepared to raise the cash rate further if upside inflation risks materialise, emphasising a data-dependent approach focused on returning inflation sustainably to target while supporting full employment. The next RBA board meeting is scheduled for late September.
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