RBA keeps interest rates on hold at 4.35pc in June

The Reserve Bank considered an interest rate hike, but not a rate cut, governor Michele Bullock has revealed, in a fresh blow to households hoping for some cost-of-living relief.

Ms Bullock — speaking on Tuesday after the RBA announced it was keeping interest rates on hold at 4.35 per cent — said she was “very conscious” high interest rates were really hurting some people.

But she twice in a 35-minute press conference in Sydney said people’s budgets were under pressure from high inflation — which is what the RBA was trying to push lower by keeping interest rates so high.

“I can’t tell (people) when we will bring interest rates down but I can say that my laser focus and the board’s laser focus is on bringing inflation down and that will help them,” Ms Bullock said. “That will really help them.

“I do understand that it affects different people in different ways (but) it is our only tool to bring inflation down.”

She also emphasised the RBA was facing a “really complex” situation — inflation had come down but was proving sticky, with progress to keep lowering it stagnating.

Rates were left on hold due to the uncertain economic outlook and the view that they are high and therefore helping to keep the economy from growing. Ms Bullock said the board was not looking for a certain number of inflation reports before making a decision on bringing them lower, but rather a suite of data.

Asked whether the recent State and Federal Budgets — replete with cost-of-living relief and incentive payments — would factor into the RBA’s decisions, Ms Bullock said the board considered the total economic context.

“I don’t think it’s very helpful to think about the Budgets in isolation, I think you need to think about them in the context of what else is going on and . . . GDP absolutely not growing at all,” she said, adding it was more appropriate to look holistically across the economy rather than whether the Budgets were expansionary.

But the board in its statement there was a risk that household consumption, or spending, would take longer to pick up once real disposable incomes grew as expected later this year — in part due to tax cuts scheduled for July 1.

“Inflation is easing but has been doing so more slowly than previously expected and it remains high,” it said.

“The board expects that it will be some time yet before inflation is sustainably in the target range.

“Recent Budget outcomes may also have an impact on demand.”

Treasurer Jim Chalmers said measures in the Federal Budget were working to bring down inflation, which is now at 3.6 per cent. The RBA, through its rate hikes, is trying to get the inflation rate back to its target of between 2 and 3 per cent.

“We know that the interest rate rises already in the system are having an impact because people are under pressure and our economy is soft,” he said.

Shadow Treasurer Angus Taylor acknowledged the RBA’s uncertain outlook and said: “The only thing that is certain is that this Government’s Budget absolutely failed to deal with those inflationary interest rate pressures that Australians are facing.”

The governor said the impact of tax cuts would be mixed: some people would welcome them as a chance to tackle their cost-of-living pressures, but some people would save them and still others would look to put them towards mortgage offset accounts.

Ms Bullock also acknowledged consumer sentiment was at multi-decade lows, because people were feeling the impact of high inflation and high interest rates.

“But the thing that’s really quite positive is employment, so I think while everyone is a little bit down in the dumps, I think it’s also true that they’ve got jobs,” she said.

“I think that’s really important for the future.

“Real incomes are going to start rising again in the latter half of this year and into next year and I think that will help people’s confidence.”

Commonwealth Bank head of Australian economics Gareth Aird said the RBA would not want to lift rates again, but quarterly inflation could test its plans.

“(It) appears increasingly concerned that walking the narrow path between preserving gains in the labour market, whilst returning inflation to the target band within an acceptable timeframe is getting narrower,” he said.

Still, CBA expects rate cuts from November but cautioned that may change depending on the data.

Saxo head of FX strategy Charu Chanana said the bar for another rate hike would be high.

“There is limited scope to expect the RBA to ease before they see at least two more quarterly inflation prints,” she said.

The RBA has four meetings for the rest of this year.

Deloitte Access Economics partner Stephen Smith said the RBA’s decision was the right one given the economy was on “a knife’s edge”.

“Rebuilding the productive capacity of the economy and its run rate should be the main game in town,” he said.

“An over-exaggerated emphasis on demand management in a weak economy and with inflation trending down will only result in an unnecessary and painful recession.

“Nobody likes the fact that inflation remains just outside of the RBA’s target band. But it is better than a recession.”

KPMG chief economist Brendan Rynne said the RBA appeared to be trying to keep consumer sentiment lower to avoid a jump in asset prices, which could boost spending.