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MNI RBA WATCH: Anticipation Builds for Another RBA Rate Rise
The likelihood of another 25bp bump to the Reserve Bank of Australia's official cash rate – taking it to 4.1% – at the RBA's June 6 meeting has risen following a sharp jump in the country's minimum- and award-wage system and a persistently high monthly inflation print earlier in the week.
Another hike on Tuesday would also fit with the Reserve’s more hawkish statements made following May’s decision, which took the cash rate to 3.85% – a largely unexpected move (See MNI POLICY: Investors Systematically Underestimating RBA).
The market reacted strongly to both data points this week, with overnight index swaps lifting peak rate expectations to 4.15% by August and implying a 57% chance of a hike at June’s meeting. Australian Commonwealth Government Bonds traded weaker on Friday as economists turned hawkish following the minimum wage decision (See AUSSIE BONDS: Heavy As Economists Turn Hawkish & Minimum Wage Outcome Announced).
The higher April CPI print at 6.8% from 6.3% reported in March was driven in large part by the unwinding of April 2022's reduction in the fuel excise tax, according to the Australian Bureau of Statistics. However, the indicator still recorded a 6.5% gain excluding volatile items, down from March’s 6.9% figure.
Monthly CPI is a relatively new series first published by the ABS in 2022 and a number of economists have warned against placing too much weight on its calculation. The RBA will want to see Q2 CPI due out July 27 for a fuller picture of inflation, they say. Q1 CPI published in April showed inflation at 7%, down from Q4's 7.8% peak, but well above the RBA's 2-3% target band.
The Fair Work Commission’s better-then-anticipated 5.75% lift to award wages and an effective 8.6% increase to the national minimum wage will also add to pressure on the RBA to lift rates.
During a Senate Economics Legislation Committee meeting on Wednesday, Governor Philip Lowe argued that increasing wages without corresponding gains in productivity would be problematic and that a cut in unit labour costs – or wage increase, plus productivity gains – was needed over straight pay rises. The RBA expects the Wage Price Index to peak at 4% from its previous 3.7% reading (see chart).
Delivering its decision, the Commission noted the increase would not significantly add to inflation, however, about 20.5% of the country's workforce will gain from the increase.
A NEW PEAK
The RBA could still choose to pause in June while it waits for stronger indicators, such as the quarterly CPI figure, according to former RBA staffers. However, most economists and commentators believe the Reserve will need to adjust its peak cash rate forecast higher, despite Lowe’s recent comments at the Senate hearing that the rate was “constrictive”. Ex-RBA staffers have told MNI since April rates would likely need to move past 4% to pull inflation down significantly.
Lowe will provide greater detail on the Board’s next decision at the Morgan Stanley Australia Summit in Sydney on June 7.
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