The Reserve Bank of Australia has reaffirmed that monetary policy remains restrictive, with minutes from its June meeting showing policymakers opted to leave the cash rate unchanged as they weighed persistent inflation risks against heightened uncertainty stemming from the Middle East.
The minutes, released on Tuesday, detailed the Board's decision to keep the cash rate steady at 4.35%, with members concluding that existing policy settings remained appropriate despite easing financial conditions globally.
Policymakers noted that global financial markets had become more accommodative following progress towards resolving the conflict between the United States and Iran.
"Members observed that financial conditions abroad had eased somewhat since the previous meeting, in response to progress towards resolving the conflict in the Middle East. Expectations for central bank policy rates had generally declined, oil prices had fallen significantly and equity prices had risen in many countries.
"Members acknowledged the indications of a potential resolution of the conflict but noted the ongoing uncertainty over the final outcome and the implications for energy markets."
However, the Board cautioned that policy expectations abroad remained elevated despite the recent improvement in market conditions.
"Even after the recent easing in financial conditions, policy interest rate expectations across many advanced economies remained higher than before the start of the conflict in the Middle East."
"Financial markets continued to expect that many advanced economy central banks would tighten monetary policy before the end of 2026 in response to above-target inflation and concerns about the inflationary effects of the conflict."
Board members observed that monetary policy had become more restrictive following three cash rate increases since the beginning of the year, although market expectations for future policy had moderated.
"Turning to Australia, members noted that financial conditions had tightened since the start of the year following three increases in the cash rate target.
"However, financial market participants’ expectations for the future path of monetary policy had eased noticeably since May in response to lower global oil prices and weaker-than-expected data for both the labour market and headline inflation in Australia in April."
The Board also discussed updated estimates of the neutral interest rate, concluding that the current cash rate remained at the upper end of model estimates and above those of most market economists.
"Members agreed that financial conditions were now probably somewhat restrictive. They discussed updates made by the staff to some models of the neutral rate, noting that these did not materially alter their assessment of financial conditions.
"The cash rate target sat at around the top of the range of these model estimates, and above the range of market economists’ estimates of the neutral rate.
"Members observed that estimates of the real neutral rate had risen over preceding years – consistent with a global trend, which probably reflected factors such as increased investment in the energy transition, defence and, more recently, data centres – and were a little higher than when the cash rate target was previously at its current level.
"Members nevertheless emphasised that assessments of the neutral rate are inherently uncertain and do not provide a direct guide for monetary policy."
The Board also examined the impact of the conflict in the Middle East on energy markets, noting that the recent interim peace agreement between the United States and Iran had helped stabilise oil prices, although risks remained.
"The recent announcement of an interim peace agreement between the United States and Iran was a welcome development but this was only the first stage of resolving the conflict in the Middle East.
"The associated decline in global energy prices had left the oil price futures curve broadly in line with the May baseline forecast assumptions. Members noted that inventory drawdowns and increased supply from elsewhere had continued to buffer the impact of energy supply disruptions in the Middle East on global energy markets.
"Domestic retail fuel prices had been a little lower than expected, though some of the recent decline would be reversed if the temporary fuel excise reduction expired on 30 June as currently legislated.
"Members noted that, even if a lasting agreement to end the conflict were reached, it would take some time for global production and distribution of oil and affected commodities to return to more typical levels."
On the domestic policy outlook, the Board reiterated that current financial conditions were restraining economic activity as intended.
"Members judged that Australian financial conditions were now somewhat restrictive, although this remained uncertain. It would take some time to assess the ultimate impact on the economy of the tightening in monetary policy since February but, at this stage, it appeared to be having broadly the expected effect.
"Housing demand had eased, which also reflected the broader economic environment and recently proposed tax changes."
Ultimately, members concluded that leaving the cash rate unchanged remained the appropriate course while geopolitical uncertainty persisted.
"Members agreed that leaving the cash rate target unchanged was appropriate given the ongoing uncertainty related to developments in the Middle East.
"They noted that, if the emerging path to resolution of the conflict proves enduring, it could reduce the extent to which firms pass on higher costs to consumer prices.
"However, they acknowledged that, even in that case, it was still likely that underlying inflation would increase to some extent in response to recent fuel supply disruptions."
ANZ analysts said the minutes reinforced expectations that the RBA would maintain a restrictive policy stance for an extended period.
"Our RBA views are unchanged on account of these minutes (we expect the cash rate to remain at 4.35% for the next year or so), notwithstanding that the minutes underscore the Board’s hawkishness and hence the risk of a further rate hike."
