MNI RBA WATCH: Hold Likely As Economy Softens

The Reserve Bank of Australia board is likely to hold its cash rate at 4.35% after it meets over June 17-18, but weak GDP growth, continued pressure on household spending and decelerating wage gains could soften its language regarding the prospect of further increases.

While inflation according to the monthly CPI indicator has edged slightly higher (See chart), the broad trend of price rises continues to ease and the RBA’s sharpened focus on employment will make it less inclined to make its first hike since May 2023 barring a larger shock, former staffers have told MNI. (See MNI: RBA's Labour Focus To Keep Rates Lower - Ex Staffers)

The overnight index swaps markets have priced in a 32.5% chance of a 10 basis point cut next week, but the market also gives a hike at the subsequent Aug 6 meeting a 26.7% chance.

The RBA’s updated Statement on Monetary Policy, which illustrated a more elevated path for CPI to return to target, has likely contributed to the market’s indecisiveness, and led Governor Michele Bullock to defend the bank’s credibility and warn against too much focus on individual data prints. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility)

STALLED GDP

The Australian Bureau of Statistics released Q1 National Accounts data in June, showing significantly slower GDP growth at 0.1%, 10 basis points less then expected. (See chart)

The RBA will also be conscious of the fall in the household savings ratio to 0.9% in Q1 from Q4’s 1.6%. While spending rose 0.4%, compared to Q4’s 0.1%, the increase was driven by energy cost increases, according to the ABS.

PROXY CUTS INCOMING

The federal government will implement its stage three tax cuts from July, which some economists have equated to a 25bp cash rate cut. Cost-of-living measures, such as rental and energy subsidies, will also take effect starting next month, the start of the 2024-2025 financial year, which Treasurer Jim Chalmers says will put downward pressure on headline inflation in the short term.

While the extra spending will likely not pressure the RBA to raise rates, it could force the Reserve to hold the cash rate steady for longer, former staffers tell MNI.

WAGES & LABOUR

The labour market will also encourage the RBA to hold steady, given its refreshed focus on employment.

While joblessness fell in May 10bp to 4.0%, the data showed underutilisation creeping up 0.3 percentage points to 10.7%.

The March quarter Wage Price Index also rose below expectations at 0.8%, or 4.1% in annual terms. The Reserve expects the WPI to reach 4.2% y/y by the June quarter.