MNI RBA WATCH: Board Set For Pause As CPI Slows

The Reserve Bank of Australia board looks set to hold the cash rate at 4.1% for a third consecutive month when it meets Sept 5, as inflation continues to fall towards its 2-3% target band, unemployment rises and wage growth moderates.

Data points published since the RBA board last met (See MNI RBA WATCH: RBA Pauses With Tightening Bias) have shown the economy responding to the Reserve’s higher cash rate, while some argue restrictive fiscal policy has also stoked unemployment and slowed the economy.

The market’s stance on Australia’s cash rate trajectory has also shifted dramatically over the month, with overnight index swaps now pricing in a 3% chance of a cut at the next meeting (see chart), a far cry from the 4.3% peak by Nov the market expected prior to the Aug 1 decision.

This meeting is Philip Lowe's last as Governor, before being replaced by current Deputy Governor Michele Bullock on Sept 17.

LOWER CPI, HIGHER UNEMPLOYMENT

Monthly CPI printed lower at 4.9% y/y, beating the expected 5.2%, data from the Australian Bureau of Statistics showed this week (see chart). While core CPI recorded a more moderate 5.8%, and the RBA typically prefers the quarterly inflation measure, the board will look favourably on the faster-than-expected drop as evidence its more restrictive policy continues to slow price growth.

Unemployment also rose to 3.7% in July from 3.5% in June and higher than the expected 3.6% (see chart). A 24,200 drop in full-time employment drove the reduction, with part-time employment rising by 9,600. The RBA believes 4.5% represents sustainable unemployment and expects to reach that level by end-2024.

Wages, meanwhile, rose 0.8% over Q2 and 3.6% y/y, continuing the metric’s weaker trajectory inline with the RBA’s view. While retail sales printed 0.5% higher over July from June’s 0.8% decline, they continued to slide y/y, illustrating the increased cost of living pressure on consumers.

THE GREAT PLATEAU

Ex-RBA staff believe the Reserve will only hike further should data surprise, or price rises fall outside of expectations – slower wage growth and continued falling inflation will do the RBA’s work. (See MNI: Rate To Plateau, Despite Strong Inflation - Ex-RBA Staff)

Restrictive fiscal policy – the government expects a AUD19 billion surplus this financial year – will also add pressure on the labour market and help cool the economy. However, some officials note the weak Australian dollar may stoke inflation, while others see some – yet limited – risk a China slowdown may weaken the economy, depending on how the Chinese government responds.