The Reserve Bank board is prepared to lift interest rates again depending on the state of the economy and the trajectory for still high but sinking inflation.
In the minutes from the May board meeting where members landed on another 25 basis point hike to the surprise of markets and many experts, board members considered "several arguments" for a hike and keeping the cash rate on hold.
Despite pausing interest rates in April to allow new data and information about the economy to come to light, board members became nervous about the risk of inflation proving harder to dislodge than the modelling would suggest.
Topping the list of possible "upside surprises" for inflation was housing costs, with board members concerned strong population growth and low rental vacancy rate could push rents up even higher than already imagined
The prospect of persistent service inflation observed in other countries was also flagged as a concern, as well as the risk of productivity growth staying very weak and allowing unit labour costs to grow "uncomfortably fast".
Board members also remain wary of price setting and wages following one another, making it difficult to get inflation down quickly, as well as the influence of the April pause on home prices (which had been lifting) and the exchange rate (which had been depreciating).
On the other hand, inflation had clearly peaked and consumption was weak when considered per person and households were clearly feeling financial pressure from rising mortgage costs and high inflation.
Plus, board members reiterated that interest rate movements tend to hit with a lag.
"In weighing up the two options, members recognised that the arguments were finely balanced but judged it was appropriate to increase interest rates at this meeting," the minutes read.
In terms of communicating the decision, the board wanted to make it clear that members were determined to bring inflation back within target without triggering a recession, and would base its decisions on incoming data and how the various inflation risks evolved.
"Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve," they concluded.
A confidence index, compiled each month by Westpac and the Melbourne Institute showed consumers have been uneasy since the May hike as well as the federal budget.
The index fell 7.9 per cent to 79 points in May from 85.8 in April.
Westpac chief economist Bill Evans said the index had almost fallen back to the "dismal levels" seen in March, when the index recorded its lowest monthly reading since the pandemic kicked off in 2020.
While not necessarily damning of the budget, the index was a reflection of the limitations on the government to hand out more cost of living relief at a time of high inflation, Mr Evans said.
Consumer surveys also tend to dip before and after budgets, he noted.
While consumers remain lukewarm on the inflation and debt-constrained federal budget, the Labor government's efforts to address fiscal issues has secured its triple-A credit rating assigned by Fitch Ratings.
The agency ticked off the federal government's decision to bank most of the revenue gains from strong commodity prices and a robust labour market.
Early steps to improve structural budget pressures by reforming the NDIS and bringing in extra revenue were also noted, although the agency said more work was needed.
© AAP 2023