The RBA board meets Aug 5-6.
Q2 inflation fell largely inline with the RBA’s predictions, which will give the board encouragement the cash rate remains restrictive and its timeline aiming to pull CPI back to the 2-3% target by 2026 remains on track. Mixed employment, retail sales and housing data will also drive the board's caution.
The RBA's overnight index swaps market has priced in a cumulative 21 basis points of easing by year-end, a dramatic turnaround following this week’s inflation print. (See chart) Volatile monthly inflation data had previously led many to believe the board could hike next week. (See MNI: RBA Risks Credibility, Next Rate Call Unclear-Ex Staffers)
The board has held the cash rate steady since November 2023.
HIGHER CPI
Q2 headline CPI printed at 3.8% y/y, or 1.0% q/q – in line with market and RBA expectations – but 20bp higher than Q1. Trimmed mean fell 10bp to 3.9%, lower than the 4% expected, but 10bp higher than the Reserve’s forecasts. Services inflation, a key area of RBA focus, also gained 20bp over Q1 to 4.5% y/y, while the domestically focused non-tradables inflation rose 5%, still elevated but unchanged from the March quarter.
While CPI fell within the RBA's expectations, the result will likely not induce the board to shift to a dovish tone. The RBA, which has warned against reading too heavily into any single data print, will want to see further evidence of falling inflation. (See MNI POLICY: Higher May CPI No Surprise For RBA)
VOLATILE PRINTS
The labour market has continued to show its resiliency, with unemployment holding steady at 4.0% and employment recording over 50,000 jobs added, considerably higher than the 20,000 expected.
The monthly CPI indicator has also made forecasting the RBA’s next move difficult, as it has consistently shown inflation edging higher, leading many former staffers and market economists to suggest further rate hikes were in order prior to this week’s CPI print.
However, the data remains mixed.
Retail sales contracted by 0.3% in Q2, below expectations and despite a better than expected 0.5% rise in nominal sales in June. The total number of dwellings approved also fell 6.5% in June to 13,237, after a 5.7% rise in May.
CHINA WILDCARD
While sticky inflation will drive the RBA to maintain its strong tone, China’s economic weakness could lead the Reserve to shift dramatically later in the year, one former staffer told MNI recently.
The RBA’s China concerns will show through via its comments on the terms of trade or the currency, he said, adding the board could be forced to lower rates sooner-than-expected should Beijing fail to stimulate its economy adequately.