MNI RBA WATCH: Case Builds For July Rate Hike

The Reserve Bank of Australia will decide whether to hike the official cash rate 25bp to 4.35% at its meeting on July 4, as strength across the economy continues to beat its models and expectations, and inflation persists above its 2-3% target band.

A lift would represent the 13th increase since this hiking cycle started in May 2022 and add to the already-restrictive monetary-policy settings the Board has implemented with its 400bp rise over that time.

While monthly CPI printed lower in June (See MNI BRIEF: Aussie Monthly CPI Slows to 5.6%) retail sales have tracked higher. The housing market and measures of labour strength also remain elevated. Markets, meanwhile, have priced in a 50% chance of a hike, with the rate seen peaking at about 4.5% by November. Industry predictions remain mixed, but most commentators agree the rate will likely peak at 4.6% by August.

CPI & RETAIL SALES

Headline monthly CPI in May printed below 6% for the first time in over 12 months, however, annual trimmed mean inflation remained strong at 6.1%, only 60bp lower than in April. While the RBA values the monthly data, it prefers the more established quarterly figure, which the Australian Bureau of Statistics will update on July 27.

The RBA will also focus on this month’s ABS retail sales figures, which gained 0.7% in May m/m, and 4.2% y/y (see chart). The NAB Online Retail Sales Index also grew 3.7% m/m, compared to 0.2% in April. Both the ABS and NAB data saw spending increases across most categories, though early end-of-year promotions had likely boosted sales.

HOUSING

The stubborn rise in house prices has also confounded the RBA and its models (See MNI POLICY: House Price Strength Thwarts RBA Models) and the Board will take elevated prices as evidence its rate hikes have not blunted household spending power. House prices across Australian capital cities have defied the RBA’s logic, with recent REA Group PropTrack Home Price Index data showing the market returning to annual growth and gaining 0.41% in June and 0.06% y/y. ABS data also showed the value of total residential dwelling rose over the March quarter.

LABOUR

The tight employment market will also weigh on the Board’s decision. The unemployment rate decreased 10bp to 3.5% in May, a far cry from the RBA's 4.5% non-accelerating rate of unemployment estimate and 2025 target. The increase in labour mobility, which hit a 10-year high recently with 9.5% of the workforce flipping employers in the 12 months to February, will also add to concerns. However, ABS data this week showed some weakness could be developing, with total job vacancies in May decreasing 2% from February.

PAUSE CASE

The RBA could choose to walk a cautious path again and wait for July’s quarterly inflation print. As reported by MNI, the Reserve is using its “best judgement” over important data the Board uses to formulate its decisions, such as NAIRU and the neutral rate, so Tuesday’s decision could hinge on how that reads on the day. Ex-staffers and board members have noted the RBA faces the risk of hiking too far and have stressed the economy will take close to 18 months to show the full impact of the 400bp rate hikes. The Board could agree and choose to wait on data again, as it did in April.