MNI RBA WATCH: Rates Held; Services, China Caution Noted

The Reserve Bank of Australia board said Tuesday Australia had passed its inflation peak despite services prices rising briskly and nodded to the growing risk of China’s slowing economy, following its decision to hold the official cash rate at 4.10% for the third consecutive month.

While the board's decision fell in line with market expectations (See MNI RBA WATCH: Board Set For Pause As CPI Slows), overnight index swaps responded, cutting peak rate expectations to 4.10%. Ex-RBA officials recently told MNI that the cash rate could plateau at 4.10% for some time. (See MNI: Rate To Plateau, Despite Strong Inflation - Ex-RBA Staff)

Australian commonwealth government bonds were 1bp richer after the decision and flat to 3bp cheaper on the day. (See Slightly Richer After The RBA Leaves The Cash At 4.10%, Q2 GDP Tomorrow)

CPI & SPENDING

In a statement, RBA Governor Philip Lowe, sitting as Governor for his last rate decision, noted the monthly CPI indicator for July showed a further decline.

July’s monthly headline CPI read printed at 4.9%, below the market’s 5.2% expectation. However, CPI excluding volatile items recorded a more modest reduction to 5.8% from the prior month's 6.1%. The RBA typically views monthly CPI as volatile and aims to rely more on quarterly reads.

Similar to past communications, Lowe pointed to persistent services inflation and concerns over consumer spending. "There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight," he noted. "The outlook for household consumption also remains uncertain."

Overall household spending decreased 0.7% y/y in July, however, spending on services gained 2.4%, while goods fell 4.1%, the Australian Bureau of Statistics noted Monday. The data showed nondiscretionary spending gained 1.7%, while discretionary spending fell 3.3%, illustrating the squeeze on household budgets and its impact on the economy (see chart).

CHINA RISK

Lowe also pointed to the increased risk China’s slowdown represented to the Australian economy, particularly the ongoing stress within the property market. MNI recently reported on the impact China’s economic trouble could have on Australia, seen by many as the most exposed developed market economy.

The Governor will provide further insight when he delivers a speech at the Anika Foundation in Sydney on Sept 7 -- possibly his last official appearance as Governor.