MNI RBA WATCH: RBA Pauses Despite Still Sticky CPI

The Reserve Bank of Australia called time again on interest-rate hikes, leaving the cash rate steady at 4.10%, despite recent monthly headline and core inflation prints well above its 2-3% target range and a historically tight labour market.

Consensus among the market and commentators was evenly split leading into the decision, making today’s call one of the most contentious since the RBA began hiking rates in May 2022. Following the call, the overnight index swap rate lowered its peak rate expectations (see chart), with 4.45% now priced in by December, compared to the previously anticipated 4.5% by November.

MNI outlined the case for a pause leading into the decision, noting the RBA could stand pat as it awaited quarterly CPI data due July 27, despite a strong case for a 25bp move (see: MNI RBA WATCH: Case Builds For July Rate Hike). July's pause follows a similar decision in April.

In a statement, Governor Philip Lowe noted the decision to pause will allow the Board more time to assess the impact of the increases to date and the economic outlook, echoing recent calls from ex-staffers and board members to slow the pace of hikes.

MONTHLY CPI

Lowe noted inflation in Australia had passed its peak and the recent monthly CPI print – which showed headline inflation had fallen to 5.6% y/y in May from April’s 6.8% – marked a further decline. However, the RBA views monthly inflation as volatile, illustrated by the much weaker softening in CPI excluding volatile items and travel which rose 6.4% y/y in May, down 10bp from April. Trimmed mean also printed at 6.1% y/y, down from April’s 6.7%. A hike in August will greatly hinge on the more trusted and less volatile quarterly CPI result.

LABOUR & WAGES

Lowe also noted conditions in the labour market had eased, but remained tight. The unemployment rate fell in June 10bp to 3.6%, however, the underemployment rate rose 0.3pp to 6.4%. The Australian Bureau of Statistics will next release unemployment data on July 20.

“Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels,” Lowe said. “Labour force participation is at a record high and the unemployment rate remains close to a 50-year low. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.”

OUTLOOK UNCERTAIN

While the Board expects the economy to grow as inflation returns to its target, the outlook for household consumption remains uncertain, Lowe added. "There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years,” he continued. The Board retained its tightening bias, noting it will continue to pay close attention to the global economy, trends in household spending and inflation, and labour market forecasts.

The RBA's next policy decision is due on August 1, with the quarterly Statement on Monetary Policy expected on Friday August 4.