MNI POLICY: RBA Watches Data For Downside Inflation Risk

MNI (SYDNEY) - Despite recent hawkish rhetoric the Reserve Bank of Australia is closely watching household spending and hours worked data for signs that inflation will fall back to target more quickly than anticipated in its August forecasts, MNI understands. 

The Reserve currently expects trimmed-mean inflation to return to its 2-3% target band by December 2025 but Q3 National Accounts data due on Dec 4, and labour force data due Oct 17, will provide updates on spending and hours worked, which could point to a faster decline. The RBA did not take its tightening cycle as far as other major central banks, but while RBA Governor Michele Bullock has declined to rule out further hikes in the cash rate from its current 4.35%, overnight index swaps now imply a 25-basis-point cut in February 2025. (See MNI RBA WATCH: Changed Messaging Considered In Hawkish Hold)

Household spending could fall faster than expected if consumers choose to save stage three tax cuts and government energy rebates at a higher rate than assumed. With unemployment at 4.2%, slightly below the RBA’s rough 4.4% estimate of the Non-Accelerating Rate of Unemployment, officials have anticipated that any weakness would present through a fall in vacancies. However, if the NAIRU is slightly lower than it has calculated, faster labour market cooling could be seen via hours worked.

AUD CONCERNS

The RBA is less concerned about potential Australian dollar appreciation and its impact on underlying inflation due to its past patchy relationship with import prices and its influence on wider economic activity. The local dollar rose 4.4% to USD0.69 in September following the announcement of monetary stimulus from the People's Bank of China's monetary policy measures. The currency has since fallen back to USD0.67

While a strong Australian dollar might lift commodity earnings, non-mining sectors such as tourism will suffer, while moderate currency appreciation has historically not weakened underlying inflation. The RBA would be more concerned by rapid changes to the exchange rate, such as that which occurred following the end of the mining investment boom in the early 2010s, which produced a sharp move from above parity with the greenback.