There is a risk that high interest rates could force unemployment higher than needed to bring inflation down, the central bank has admitted.
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At its July 4 meeting at which it decided to hold the cash rate steady at 4.1 per cent, the Reserve Bank of Australia board discussed the possibility that increased savings and reduced consumption would slow demand for workers.
As a result, the RBA said in board meeting minutes released on Tuesday, "the unemployment rate would be likely to rise beyond the rate required to ensure inflation returns to target in a reasonable timeframe".
The central bank has been pursuing a strategy to gradually bring inflation down to 3 per cent by mid-2025 in order to hold down any increase in unemployment as the economy slows. It currently forecasts the jobless rate to reach 4.2 per cent by mid-2024 and 4.5 per cent by June 2025.
But the minutes show the RBA board is concerned that as the impact of recent interest rate hikes increasingly feed through the economy, spending will slow more sharply than it expects, dragging on employment and pushing the unemployment rate up higher than necessary.
The minutes come amid controversy over remarks by incoming RBA governor Michele Bullock that the central bank had a goal to lift the unemployment rate - currently at 3.6 per cent - to 4.5 per cent.
Ms Bullock told a business forum last month that the current low level of unemployment was inconsistent with the RBA's aim to bring inflation down and a jobless rate around 4.5 per cent was needed to ensure a long-term sustainable balance between demand and supply for labour.
Her remarks were attacked by Australian Council of Trade Unions secretary Sally McManus, who said that "forcing up unemployment is not the answer" to taming inflation.
Ms McManus said the RBA needed to give attention to the role of corporate profits in driving inflation, rather than wages.
While inflation, particularly for services, was still "too high", labour costs were increasing, productivity was weak and the outlook for household consumption was uncertain, the central bank also recognised the intense financial pressure on many families, according to the central bank .
It said mortgage repayments had reached a historic high of 9.4 per cent of household disposable income, consumption was weak, savings were below pre-pandemic levels and total real income had fallen by 4 per cent in the year to the March quarter.
Underlining these concerns, the board decided against a July rate hike, preferring instead to hold off until further data on the economy, particularly inflation, employment, household spending and global conditions, is available.
June jobs figures are due out on Thursday and the June quarter consumer price index will be released on July 26.
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By the time of the August 1 meeting, RBA staff will have also released their latest long-term forecasts for inflation and economic activity.
"Noting both the uncertainty around the outlook and the significant increase in interest rates to date, members agreed to hold the cash rate steady and reassess the situation at the August meeting," the RBA board ministers said.
But markets and economists think there will be at least one more rate hike, possibly as early as next month.
The central bank itself thinks that is a possibility.
"Some further tightening of monetary policy may be required to bring inflation back to target within a reasonable timeframe," the board minutes said, though adding the caveat that, "this depended on how the economy and inflation evolve".