Australia central bank saw downside risks to employment when holding rates

SYDNEY, July 2 (Reuters) - Australia's central bank pondered whether a further rise in interest rates was needed to bring inflation to heel at its June policy meeting, but decided to stand pat in part due to the risk of a sharp slowdown in the labour market.

Minutes of its June 17-18 board meeting out on Tuesday showed the Reserve Bank of Australia (RBA) considered raising its 4.35% cash rate amid doubts policy was not restrictive enough to bring inflation - currently running at 4.0% - to its 2-3% target band.

"This could be the case if it was judged that inflation was returning to target more slowly than previously assumed or that the gap between aggregate demand and aggregate supply was not closing quickly enough," said the minutes.

As a result, it did not rule out or in any future changes to policy.

In the end, the board judged the case for holding steady was stronger given the economy was still tracking broadly as expected, with inflation seen returning to target in 2026, output growth staying weak and risks to the labour market on the downside.

They noted a drop in vacancy rates pointed to weakness ahead and that historically the unemployment rate could rise quickly once it did start to rise. A continued rapid rise in business insolvencies was also cited as a concern.

"Members agreed that collective data received since the May meeting had not been sufficient to change their assessment that inflation would return to target in 2026 despite some elevated upside risk around the forecast."

The RBA has held interest rates steady for five straight meetings now, having raised them by 425 basis points to a 12-year high since May 2022.

Markets are wagering there is a 36% probability that the RBA could hike in August depending on the outcome of second-quarter consumer price inflation report due at the end of July. Monthly readings for both May and June CPI had surprised on the upside.

Investors have given up any thought of an easing this year and are only pricing in 17 basis points of cuts by the end of 2025.

The board in the minutes affirmed their assessment that it was still possible to bring inflation to target while preserving job gains, though they did acknowledge that the "narrow path" was becoming narrower.

Members noted that household consumption had been revised higher in the first quarter, while there were signs that inflation was taking longer to abate than previously assumed.

This raised the question about whether policy settings were sufficient restrictive and much will depend on inflation expectations,

"Members judged that if inflation expectations were to rise materially from currently levels, it could require significantly higher interest rates to bring inflation back to target," the minutes showed.

(Reporting by Stella Qiu; editing by Wayne Cole)

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Keywords: AUSTRALIA RBA/MINUTES