RBA issues warning over inflationary spending

The Reserve Bank of Australia (RBA) kept the official cash rate on hold at 4.35% in June but would not rule out another hike in the future.

The RBA board noted that inflation had fallen substantially since its peak in 2022 but said recent federal and state budgets could "add to demand".

"Recent budget outcomes may also have an impact on demand, although federal and state energy rebates will temporarily reduce headline inflation," the board said.

"The persistence of services price inflation is a key uncertainty. Also, although growth in unit labour costs has eased, it remains high. Productivity growth needs to pick up in a sustained way if inflation is to continue to decline."

The RBA said returning inflation to target is still the main priority, but there were many uncertainties weighing on the task.

"Returning inflation to target within a reasonable timeframe remains the board's highest priority. This is consistent with the RBA's mandate for price stability and full employment. The board needs to be confident that inflation is moving sustainably towards the target range," it said.

"Inflation is easing but has been doing so more slowly than previously expected and it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range."

The board said that recent data has reinforced the need to "remain vigilant" to upside risks to inflation.

"The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out," it said.

"The board will rely upon the data and the evolving assessment of risks. In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.

"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."