MNI RBA WATCH: RBA Pauses With Tightening Bias

The Reserve Bank of Australia's decision to hold rates steady at 4.10% but maintain a tightening bias on Tuesday will give it time to consider whether it is on target back towards its 2-3% inflation band and if a soft landing, and protecting post-Covid employment gains, is possible.

The RBA paused its cash rate for the second consecutive month, (See MNI BRIEF: RBA Pauses For Second Month At 4.10%) meeting market expectations which had priced in a 35% chance of a hike, but confounding some economists – close to 50% of whom had tipped a 25bp increase. (See MNI RBA WATCH: Sticky Services Put Rate Hike In Consideration)

Following the decision, the overnight index swap market lowered its peak-rate expectations to 4.22% by December, from about 4.3% by November prior to the meeting (see chart below). Australian government bonds were richer after the call, with futures gaining 6-8bp.

TIGHTENING BIAS

The RBA kept its tightening bias, with Governor Philip Lowe’s accompanying statement noting some further tightening "may be required," and pointing to sticky services inflation and elevated rents as particularly concerning.

Quarterly CPI data released July 26 showed services prices jumped 6.3% over Q2, the strongest gain in over 20 years and evidence that domestic sources of inflation remained strong, despite the 1pp drop in the headline rate over the quarter to 6%. Lowe noted, while goods prices had eased, "many services are rising briskly," while rent inflation was also elevated.

The RBA kept its central headline CPI forecast unchanged at 3.25% by the end of 2024, while the GDP forecast remained at 1.75% over 2024 and a little above 2% in 2025.

PROTECTING THE GAINS

The RBA’s desire to protect employment gains has largely driven its more relaxed approach to interest rate hikes to date compared to other developed economies. Lowe noted the employment rate remained tight and reaffirmed the Reserve's unemployment forecast, noting it would rise gradually from 3.5% to 4.5% by late 2024.

“Wages growth has picked up in response to the tight labour market and high inflation," Lowe noted. "At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up."

Following the July decision, the RBA minutes showed board members were increasingly concerned about household budgets and consumer sentiment. Retail trade figures released prior to the latest decision supported the board’s fear that consumers had began to tighten spending (see chart below), likely adding weight to its decision to pause.

“The outlook for household consumption is also an ongoing source of uncertainty," Lowe added. "In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.”

While the Governor has not scheduled an upcoming speaking opportunity, the RBA will release its updated Statement on Monetary Policy with refreshed forecasts on Aug 4.