Fears unemployment could lift by more than expected in a fading economy factored into the central bank's decision to leave interest rates unchanged this month.
The Reserve Bank of Australia board deliberated over a possible 25 basis point increase or keeping the cash rate on hold at 4.35 per cent, the minutes from the December meeting confirm, with the door left open to more tightening if the incoming data calls for it.
Keeping interest rates unchanged was deemed the stronger call as the flow of data over the month came in broadly in line with the RBA's expectations, with the board recognising "encouraging signs of progress" towards its goals.
The "possibility of a larger rise in the unemployment rate than anticipated" also fed into the case to keep the cash rate on hold.
The jobless rate has been moving higher, hitting 3.9 per cent in November to be 0.3 percentage points higher since the central bank last updated its economic forecasts.
Commonwealth Bank head of Australian economics Gareth Aird said this was a significant lift in the jobless rate in that time, and was suggestive of an economy slowing more quickly than expected.
"Our suspicion is that the RBA has wanted to subtly convey today that the economy has indeed slowed more than they expected in November," Mr Aird wrote in a note.
The case for lifting interest rates further in December stemmed from strong domestic demand "judged still to be running above the level consistent with the inflation target".
"And growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined," the minutes read.
The rates decision was made ahead of the September quarter national accounts that revealed a particularly bruised household sector.
Also in the context of another interest rate hike, board members discussed RBA forecasts for inflation only hitting the top of the two-three per cent target range rather than the mid-point by late 2025.
"Members noted that the staff’s most recent forecasts, which were predicated on a lift in productivity growth, would see inflation return to the top of the target band by the end of 2025, rather than the midpoint of the band," the minutes read.
Greater emphasis on the mid-point was outlined in a newly-agreed framework signed off by both the federal government and the RBA - yet there was still flexibility built into the statement around the timing of meeting price stability and full employment goals.
National Australia Bank head of market economics Tapas Strickland said the mention of the mid-point was the first since the hiking cycle kicked off in May last year and differed from the board's consistent framing of returning inflation to the top of the band.
December quarter inflation data, due in late January 2024, will be all-important ahead of the next cash rate meeting in February.
"NAB continues to see the RBA hiking in February; much will depend on the details and risks around returning inflation to the mid-point by the extended forecast horizon of mid-2026," Mr Strickland wrote in a note.
He said cuts as early as the first half of next year, as the market is pricing, were unlikely either way.
Mr Aird said the need for more rate rises had dissipated and the next move will likely be down, starting from September next year.
"Against the backdrop of rising unemployment and falling GDP per capita the board will be quite reluctant to tighten policy further," he said.
The RBA has increased interest rates by 425 basis points since May last year in a bid to bring down still-high inflation.