MNI RBA WATCH: 25bp Hike But Statement In Focus As Data Slows

The Reserve Bank of Australia is expected to hike rates 25 basis points to an almost 11-year high on Tuesday as inflation remains well above target, though softer-than-expected price and growth data will ensure a sharp focus on any tweaks to February's hawkish tone.

The rise in the Cash Rate to 3.6%, the highest since June 2012, will underscore the hawkish shift revealed at the February meeting as it struggles to steer inflation back to the 2-3% target despite 325bp of cumulative tightening over nine meetings since May 2022. Overnight indexed swaps have largely priced in a fifth consecutive 25bp hike. (See MNI RBA WATCH: Hawkish Shift Puts 25bps On Table In March)

Since adopting a more hawkish tone in February, data over the past week has highlighted both slower growth and a waning of inflationary pressures. Attention will focus on whether the statement reiterates language adopted in February that guided towards more rate hikes "over the months ahead" compared to "over the period ahead" in December.

Coupled with continued housing market weakness, the softer data has prompted traders to pull back pricing on the RBA's peak rate. Overnight indexed swaps point to a peak of around 4.2% later this year, from 4.4% priced in earlier in the week.

January's monthly Consumer Price Index, released on Wednesday, eased to 7.4% y/y from 8.4% y/y, confirming the RBA's view that it likely peaked in Q4. However, inflation remains far too high, with the February Statement on Monetary Policy forecasting a fall to only 4.75% by the end of the year and a return to the top end of the target range by mid-2025.

SOFTER GROWTH

Fourth-quarter GDP, also released Wednesday, disappointed as well, with an increase of 0.5% q/q, the second straight quarter of slower growth as higher rates and elevated inflation weigh on consumers. Household spending rose 0.3%, the weakest quarterly rise since Q3 2021, with discretionary spending slowing to 0.4%, almost in line with essential spending growth of 0.3%. The year-on-year GDP rise of 2.7% matched RBA forecasts.

However, the GDP data underscored the RBA's inflation problem. The domestic final demand implicit price deflator rose 1.4% q/q and 6.6% y/y, the largest year-on-year increase since Q1 1990, and services inflation remained strong amid a tight jobs market. RBA Governor Philip Lowe has been concerned about risks of a wage-price spiral, but recent pay data has fallen short of expectations. The Wage Price Index rose 3.3% y/y in Q4, a modest increase over the 3.2% y/y pace in Q2.

Further insight into the RBA's thinking will come on Wednesday when Governor Lowe delivers a keynote speech at a high profile business summit.