Reserve Bank minutes dovish but rate hike risk remains

Senior Business Correspondent Peter Ryan

The Reserve Bank board is holding on to the risk of another interest rate rise this year if inflation remains stubbornly high and fails to slow in line with forecasts.

But in decidedly dovish minutes from the RBA's meeting a fortnight ago, it's now increasingly clear the impact of 12 cash rate rises since May last year is now working to slow the economy and cool inflation.

In leaving the cash rate at 4.1pc on August 1, the minutes show RBA members were confident that the aggressive action was "working as intended" with monetary policy "already tightened .. significantly".

"The full effects or earlier tightening were yet to be recorded .. but consumption had already slowed significantly .. and early signs that the labour market might be at a turning point."

But there was also debate in the RBA boardroom about the need to maintain the pressure with another rate rise as a hammer blow against inflation, now running at 6 percent over the year.

"The case to raise the cash rate centred on the risk that inflation might prove to be more persistent than currently forecast," the minutes say.

"Were this to occur, it would require the Board to raise the cash rate by more than otherwise to get inflation back to target".

Members proposing the losing argument for a rate rise argued gains in the jobs market would need to be sacrificed to get inflation lower and hiking in August would "mitigate the risk of that undesirable scenario eventuating."

The minutes show members are also becoming increasingly concerned about a rebound in real estate prices.

The RBA board also remains concerned that wages growth in Australia and around the world remains "above levels that would be consistent with many central banks' inflation targets".

However, the minutes note that higher wages could be a one-off correction and might be partially offset by weaker corporate profit margins or faster productivity growth.

In the background, concerns are rising that the health of China's economy created "a high degree of uncertainty".

The minutes say China's outlook depends on a recovery in household consumption, support for the ailing property sector and the effectiveness of policy support from authorities in Beijing.