MNI RBA WATCH: Board To Consider Fourth Pause At 4.1%

The Reserve Bank of Australia will consider keeping the cash rate on hold at 4.1% for a fourth consecutive meeting on Oct 3 as trimmed mean inflation continues to moderate, the labour market shows signs of softening and uncertainty on the Chinese economy increases.

Data published since the board last met has fallen largely in line with RBA forecasts, though surging oil prices and the weakening Australian dollar may prompt the board to hike in November in pursuit of its 2-3% price target, following the release of Q3 inflation data. While the market does not expect a hike next week, overnight index swaps show elevated peak rate expectations, with at least one more 25bp hike priced in by early 2024.

This meeting will be Michelle Bullock’s first outing as governor, after the government decided not to extend Governor Philip Lowe’s term earlier in the month. Former staffers, however, believe Bullock will likely offer little change. (See MNI: Bullock Unlikely To Push Major Cultural RBA Shift)

MONTHLY CPI

While monthly headline CPI rose to 5.2% y/y in August from July’s 4.9%, higher international energy prices largely drove the move. (See MNI BRIEF: Aussie Monthly CPI Rises To 5.2%) Trimmed mean inflation, which excludes volatile items, fell over the month to 5.5% from the prior month’s 5.8%, more in line with the RBA’s forecasts of 4% CPI by the December quarter (see chart).

Some data, including August’s unemployment rate and GDP have printed stronger than expected, but the RBA board will look past single points and consider the overall trajectory of the economy. While job creation was a higher-than-average 68,000 in August, vacancies declined 8.9% over the month. The labour market cooling will comfort the RBA board, which aims to raise the unemployment rate to 4.5% by mid-2024.

NOVEMBER INCREASE?

While the board is not likely to adjust interest rates this month, factors such as global oil prices and the weakening dollar could force it to act in November.

Economists have told MNI should oil continue to rally towards $100 a barrel, and the Australian currency weaken further, inflation could remain stubbornly higher than forecasted by the RBA. The local dollar has fallen about 11% since its USD0.712 12-month high in February. The pair was trading at 0.645 at the time of writing.

The board will also examine a raft of data updates, including the RBA’s own refreshed metrics due Oct 4 and the Australian Bureau of Statistics’ Q3 CPI print on Oct 25, to ensure inflation remains on its “narrow path.” The RBA prefers quarterly data, as it views monthly CPI as more volatile. Traders are currently pricing in a 40% chance of a hike at the November meeting and a 90% possibility by March.