SYDNEY — The Reserve Bank of Australia’s move to raise the official cash rate in June was “finely balanced,” amid increasing evidence that pressure is building quickly under wage growth, the main trigger for the increase that surprised many in financial markets.
In minutes of its June 6 policy meeting published Tuesday, the RBA stressed that it will do what is needed to bring inflation back to the 2% to 3% target band over a reasonable timeframe.
“The board affirmed that its priority is to return inflation to target within a reasonable timeframe. The recent data suggested that inflation risks had shifted somewhat to the upside,” according to the minutes.
The RBA raised the official cash by 25 basis points to a 4.src% at the meeting and left the door open to further increases should inflation pressures continue to simmer.
The hike took the total amount of increases in the OCR to 400 basis points since May last year.
The decision to tighten policy settings further this month followed news of a 5.7% rise in the minimum wage by the Fair Work Commission, which exceeded the RBA’s expectations.
“This was higher than the expectations embedded in staff forecasts and would add directly to the wage price index in the third quarter,” the minutes said.
The rate at which broader enterprise-wide wage agreements are rising is also adding to doubts around wages growth, the minutes said.
“It was understandable that the lowest paid workers would be compensated for high inflation, but that it would be concerning if wages across a broad range of jobs were to become implicitly indexed to high inflation, ” the minutes said.
The RBA also highlighted that trends in wage negotiations in some areas of the economy were beginning to confirm its worst fears.
“Members observed that some firms were indexing their prices, either implicitly or directly, to past inflation,” the minutes showed. “These developments created an increased risk that high inflation would be persistent, which would make it more difficult to keep the economy on the narrow path.”
Since the policy meeting this month, expectations of a further increase in the OCR in July have risen following news of a big jump in employment growth in May.
Second-quarter inflation data will be also released in late July, with any upside surprise in the CPI likely to support the case for a hike in August.