MNI POLICY: Higher May CPI No Surprise For RBA

The market’s increased expectation of an August rate rise reflects a more accurate take of the Reserve Bank of Australia’s macroeconomic assessments than some recent market-economist commentary, but June quarter CPI data will be key as the RBA decides its policy steps, MNI understands.

May’s CPI inflation printed at 4.0% Wednesday, 20 basis points higher than market expectations and up from April’s 3.6%, but in line with the RBA’s June cash-rate-decision communications which stressed upside risks to prices remained strong. (See MNI RBA WATCH: Hikes Discussed As Bullock Steers Narrow Path)

The overnight index swaps market swiftly repriced the chances of an Aug 8, 25bp hike to the 4.35% cash rate to 44% from about 13% prior to the data print. The market has now pared that back to about 36%.

But market participants should avoid reading too deeply into singular monthly data and focus on June quarter CPI results due July 27, which will paint a fuller picture of inflation and be central to RBA deliberations. (See MNI POLICY: Markets Overplaying Impact Of Data Points On RBA)

NEUTRAL RATE

RBA Assistant Governor Chris Kent on Wednesday updated the nominal neutral rate’s estimate, increasing it significantly from pre-pandemic levels. Kent noted the board had set the cash rate at a restrictive level, about 1 percentage point above the market’s neutral rate estimate.

The RBA is watching neutral rate estimates constantly to ensure its cash rate remains restrictive, but it cannot predict whether it will need to move higher over the near term. However, strong productivity growth could trigger greater investment that could prompt a higher revision.

The RBA expects productivity growth at 1.8% over the June quarter.