Setting interest rates has become a month-by-month proposition

Inflation is at a three-decade high, the unemployment rate is at its lowest in almost 50 years, female workforce participation has never been higher, interest payments are set to gobble up a record share of household disposable income, rental vacancies are historically low, consumer sentiment is at its gloomiest in decades and the terms of trade - the ratio of export and import prices - is near a record high.

It is a complex jumble of developments - some very positive, others decidedly unwelcome.

The strongest jobs market in generations has not only meant that finding a job or working the hours you want has never been easier, but wages are moving after a decade of stagnation.

But multi-decade high inflation means that even with pay rises, wage earners are going backwards, savings are losing value and - thanks to higher interest rates - the cost of servicing mortgages and other loans has soared.

It is, as Reserve Bank of Australia governor Philip Lowe observed with characteristic central banker understatement, "a complex environment in which to be making policy decisions".

It helps explain why, as Dr Lowe said on Wednesday, interest rate decisions have become a month-to-month proposition.

When the Reserve Bank began the current cycle of rate hikes in May last year the official cash rate was still at an emergency low 0.1 per cent - the level set during the depths of the pandemic to support jobs and growth.

It was clearly too low for the times, given that inflation had already accelerated to 5.1 per cent in the March quarter and was on its way to 7.8 per cent by the end of 2022, helped along by a global rebound in demand and massive disruption to energy markets caused by Russia's invasion of Ukraine.

The Reserve Bank was forced to play catch-up all last year as it rushed to switch monetary policy from stimulating demand to constraining it.

Monetary policy is an imprecise science, so no-one is quite sure at what point that might have occurred, but Dr Lowe said on Wednesday that, "the more recent rate increase shave moved monetary policy into restrictive territory".

Signs that inflation is turning down, together with evidence that economic activity and jobs growth are slowing support his view.

The central bank also appears to be increasingly confident that household spending, which is a crucial swing factor in bringing inflation down, is moderating.

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Even though wages are growing and employment is high, the share of disposable income going to service mortgage repayments is set to reach a record high 9.5 per cent in coming months, adding to the pressure on family budgets from rising living costs.

When making decisions on monetary policy the RBA board is managing two risks, according to Dr Lowe: of not doing enough and letting inflation persist, and of doing too much and causing the economy to slow unnecessarily.

At the moment, the central bank board believes monetary policy needs to be tighter though, as the governor said on Wednesday, it is getting closer to pausing.

And Dr Lowe retains the ambition of slowing inflation while holding on to some of the recent employment gains.

The Reserve Bank currently expects the unemployment rate to reach 4.5 per cent by the end of next year. Dr Lowe thinks it may be possible to hold it below 5 per cent without reigniting inflation.