MNI RBA WATCH: Hikes Discussed As Bullock Steers Narrow Path

The Reserve Bank of Australia board discussed hiking the cash rate at its latest meeting, noting upside price risks remained, but decided to maintain its current course along the "narrow path" that aims to avoid recession while protecting employment, Governor Michele Bullock told reporters Tuesday.

"We do observe that inflation is coming down," she said. "Maybe it's going down a bit more slowly than we'd like but it is coming down. We are observing the labour market ease so we're seeing all the right signs. We do feel there is a genuine narrow path here to bring inflation back down without having unemployment rise very sharply."

She added the economy had likely troughed and would not slow further. “There are some risks on the downside, so we've got to be really alert to them and if they look like they're materialising, then that's when we have to think about whether or not we need to loosen monetary policy.”

The board’s decision was largely anticipated. (See MNI RBA WATCH: Hold Likely As Economy Softens) The RBA has now held the cash rate steady since November 2023.

Key parts of the board’s statement – published after it handed down Tuesday's decision –remained largely unchanged from May’s meeting, reflected in the flat Australian dollar overnight index swaps market, which firmed about 2 basis points. The market currently expects about 13bp of easing by December.

JUNE DATA AHEAD

Bullock noted June quarter inflation data, due July 31, will help the Reserve judge inflation's trajectory, and that recent monthly CPI Indicator prints, which have risen for the last three months, did not offer a complete picture. She said the RBA will also focus on employment data.

The RBA was forced to increase its Q2 CPI prediction 50bp to 3.8% within the last Statement of Monetary Policy, and Bullock admitted price rises had proved stickier than expected. "That's reflective of the fact that we think aggregate demand is still above aggregate supply," she added. "That's keeping inflation a little bit higher. Demand is still a bit too strong."

COMPLEX DECISIONS

The RBA and monetary policy have entered into a complex situation requiring finely balanced risks, she said.

"When we raised rates, it was quite obvious what we had to do," she said. "It's not so obvious now."

Monetary policy is restrictive and is working to lower demand, according to Bullock.

"But it's going to be a slow grind to bring inflation back. We're still forecasting to have inflation back down into the [2-3%] band by the end of 2025 and then by 2026 will hopefully be tracking to the midpoint."

The Reserve will issue a fresh round of forecasts when the board next meets over Aug 5-6.

Bullock added the RBA will need to consider new information from the National Accounts, the budgets, the labour market and inflation. "That's going to inform where we think we're tracking," she added. (See MNI: Budget To Add Inflationary Pressure, Stay RBA's Hand)