Australia’s second quarter consumer price index (CPI) data due out on Wednesday is expected to show further deceleration in headline and underlying inflation, according to the latest forecasts from the big four banks.
However, the banks have mixed views on how the Reserve Bank of Australia (RBA) will react to recent data releases at its board meeting next month, particularly given the ongoing tightness in the labour market as evidenced in the most recent labour force data.
The Commonwealth Bank (CBA) has predicted that headline CPI inflation will ease to 0.9 per cent quarter-on-quarter (q/q) and 6.1 per cent year-on-year (y/y) during Q2, down from 1.4 per cent q/q and 7 per cent y/y in Q1.
Additionally, CBA has forecast that trimmed mean inflation will fall to 1 per cent q/q and 5.9 per cent y/y in the second quarter, from 1.2 per cent q/q and 6.6 per cent y/y in the first quarter.
“Given the still very tight labour market we think, short of a material undershoot in the Q2 23 CPI, the RBA will deliver a 25 bp hike at their August board meeting,” said CBA economist Stephen Wu.
“High inflation remains the key concern for the RBA, as is the case elsewhere. And the RBA is committed to returning inflation to target.”
Mr Wu pointed out that the RBA had delivered an “incredible amount of tightening in a short space of time” and noted that the 400 basis points (bps) of monetary tightening announced since May last year will take time to fully flow through to the economy.
“There is clear evidence that rate hikes are working to slow the economy and contain inflationary pressures. The Q1 23 figures confirmed that the annual rate of inflation peaked in Q4 22,” Mr Wu continued.
“While the headline CPI rate of 1.4 per cent q/q was higher than expected, the trimmed mean CPI rate came in at a lower-than-anticipated 1.2 per cent q/q. Although inflation remained too high, inflation was clearly moving back towards the RBA’s inflation target.”
CBA’s forecasts for Q2 inflation are below those outlined in the RBA’s most recent statement on monetary policy in May. At the time, the central bank predicted that annual headline inflation would fall to 6.3 per cent and trimmed mean inflation to 6 per cent.
“But we don’t necessarily view such an outcome to preclude the RBA from delivering another 25 bp rate hike in August,” Mr Wu suggested.
“The RBA board will receive an updated set of staff forecasts at the upcoming meeting. So the Q2 23 inflation figures, and [Thursday’s] labour market data, will be viewed in the context of how it influences the RBA’s inflation and labour market forecasts as well as the perceived risks around those point forecasts.
“Given that, price pressures for the individual components that make up the CPI basket could well matter here.”
According to CBA, the flow of data heading into the August meeting, and the updated staff forecasts, will not be enough to dissuade the RBA from raising the cash rate by 25 bps.
“As such, our central scenario remains a 25 bp hike, the last of the cycle. A material undershoot of CPI, however, could shift this view,” Mr Wu concluded.
ANZ makes case for a pause
ANZ has forecast that headline CPI will ease to 1 per cent q/q and 6.2 per cent y/y during Q2, with trimmed mean inflation moderating to 1 per cent q/q and 5.9 per cent y/y.
“The RBA will likely take comfort that inflation appears to be falling in line with, or a touch faster than, its May forecasts,” predicted ANZ senior economist Adelaide Timbrell.
ANZ remains an outlier among the big four banks, predicting that the cash rate will remain on hold in August with an “extended pause” from the RBA.
“While the August meeting is live, an inflation outcome around our forecast would support our expectation that, on balance, an extended pause from the RBA is now most likely (including no move in August),” said Ms Timbrell.
Meanwhile, economists at both Westpac and NAB expect that the RBA will hike at both of its next two meetings.
“Taking into consideration the signal from the April and May monthly CPI indicators, we expect the Q2 CPI report to show inflation materially below peak but still a long way from target,” Westpac’s economists said.
“With the labour market tight and unease over inflation expectations lingering, we believe hikes in August and September to a cash rate peak of 4.60 per cent and a lengthy pause to May 2024.”
