Market expectations for another rate hike by the Reserve Bank of Australia (RBA) have diminished on the back of inflation and retail sales data released during the past week.
The Consumer Price Index (CPI) lifted 0.8 per cent during the June quarter, down from 1.4 per cent in the March quarter and resulting in an annual increase of 6.0 per cent. Meanwhile, retail sales fell by 0.8 per cent in June after previously rising 0.8 per cent in May.
However, a range of leading economists still hold mixed views on how the RBA will react to the data and what the central bank’s next move will be at its meeting on Tuesday.
Commonwealth Bank senior economist Belinda Allen has forecast that the RBA will hike one final time to 4.35 per cent in what she suggested will be “another finely balanced decision”.
“While inflation remains high at 6 per cent/year, it is coming down. The CPI data follows the June labour force survey, which was overall a strong set of numbers, with the unemployment rate printing at 3.5 per cent. Retail trade was weak in June after a solid increase in May,” she said.
“This sets up a tough deliberation for the RBA Board and follows the July board meeting, where the cash rate was left on hold. The debate will be between extending the pause in the tightening cycle or hiking the cash rate by 25 bp to 4.35 per cent.”
Ms Allen described the RBA’s August rate decision as being “another line ball call”.
“Money markets currently are pricing only a small chance of a hike, with pricing falling after the June quarter inflation print. We expect the August rate hike to be the last of the cycle,” she said.
“A period of no change in the cash rate is then expected, although we would expect the RBA to continue to flag that it would raise interest rates again if required until further evidence of slowing inflation and contained wages growth is confirmed.”
Westpac chief economist Bill Evans also sees a 25 bp hike as being the most likely outcome in August. He pointed out that the RBA is due to release revised forecasts for inflation and other measures in its upcoming quarterly Statement on Monetary Policy.
“The headline inflation picture has been the key driver of recent decisions in both June and July. But that was not the case in May when the detailed quarterly report allowed for deeper and more reliable insights that were more concerning,” Mr Evans said.
“This time around, the June quarter report highlights the stickiness of services inflation while other information around the labour market and productivity pose questions about whether the staff can credibly lower the inflation profile to allow for an earlier achievement of the inflation target. Most importantly, it needs to reach the mid-point of the target range by the extended forecast end-point of December 2025.
“If, as we consider likely, the RBA’s revised forecasts show little progress in this regard then the board should take out more ‘insurance’ with an additional 25 bp rate hike at its August meeting.”
According to Mr Evans, a final hike in August, combined with an ongoing “soft” tightening bias from the RBA, would appear to be “the best approach to a difficult challenge”.
The case for an August pause
In contrast, economists at NAB have argued that June’s soft retail trade figures mean the RBA will likely keep interest rates on hold at 4.1 per cent.
“While one month of data in this goods-skewed consumption indicator won’t emphatically shift the dial on the RBA’s assessment, the weak June outcome does reverse the optimism from the May data, and would feed into the RBA’s fears that consumption may slow more than necessary – an argument that the RBA minutes included as one of the reasons for why the RBA paused in July,” the bank’s economists said.
Economists at ANZ have also maintained their forecast for an “extended pause” from the RBA moving forward, with no movement expected in August.
“Several factors support our expectation of an extended pause: inflation moderating more quickly than the RBA expected, the policy stance being described as ‘clearly restrictive’ in the recent RBA minutes, and broader signs of slowing consumer demand,” they said.
ANZ’s economists acknowledged that the labour market is still tight but said the RBA should see the combination of moderating inflation and a low unemployment rate as positive.
“It does, after all, suggest Australia is still on that narrow path to lowering inflation while still preserving the post-COVID labour market gains,” they added.
However, the economists added that they “would not entirely rule out a rate rise in August”.
Meanwhile, AMP chief economist Shane Oliver said the downward surprise in inflation and retail sales was expected to mean that the RBA will remain on hold.
“The RBA is now getting what it wanted on inflation and the ongoing weakness in real retail sales highlights the high and increasing risk that it will knock the economy unnecessarily into recession if it keeps tightening,” he said.
“That said, it is a close call and given the RBA’s concerns about services inflation and wages, it wouldn’t be a surprise to see the RBA hike by another 0.25 per cent. It would be nice to be more definitive, but it often gets like this towards the end of a tightening cycle and right now there are lots of cross currents.”
If the RBA does elect to hike on Tuesday, interest rates will reach their highest level since November 2011.
