Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
The Reserve Bank of Australia will consider raising the cash rate by 25 basis points to 4.35% when it meets Aug 1, to soften the labour market, contain domestic price rises and ensure inflation continues to fall back to its target 2-3% band within its forecasted timeline by mid-2025.
While the recent quarterly CPI print showed inflation had fallen faster than its forecast, the RBA will focus on price rises within the services sector and strong employment. The Federal Reserve’s decision this week to hike could also weigh on the board's decision. (See MNI FED WATCH: Powell Withholds Guidance, Keeps September Live)
A move higher would run against market expectations, with the overnight index swap market pricing in a 26% chance of a hike. Economists, however, are more evenly split, with 14 out of 25 expecting the Reserve to lift its rate.
STICKY SERVICES
June quarter headline CPI rose 6.0% y/y, decelerating from the March quarter’s 7%, and below the RBA’s May forecast of 6.25%. (See MNI BRIEF: Aussie June CPI Prints At 6%, Services Up To 6.3%)
While encouraging, the RBA will focus strongly on domestic sources of inflation, particularly services, which rose 6.3% over Q2, 20bp stronger than in the March quarter and its highest level since 2001. The more relied-upon trimmed-mean measure also printed at 5.9%, much closer to the RBA’s May forecast of 6.0%.
While the Reserve will likely not address this week's Fed decision, the stronger U.S. dollar rate will provide an inflationary pulse. Ex-staffers have told MNI this will likely weigh on the board and its decision.
LABOUR STRENGTH
The labour market remained tight this month, with the unemployment rate steady at its 50-year low of 3.5%, well below the RBA’s 4.5% non-accelerating rate of unemployment estimate and 2025 target. While the Australian Bureau of Statistics has not updated its wage price index since May – June quarter figures will publish Aug 15 – the tight labour market and weak productivity should keep wage acceleration high.
CALLS TO PAUSE
Some ex-staffers, however, have called on the RBA to pause. They argue supply-side disruptions have largely run their course and that the mortgage market still has a large volume of low interest fixed loans rolling into higher rate products over the next 12 months.
In its minutes from the July 4 meeting, the board also noted uncertainty over the resilience of household consumption and that the squeeze on household budgets could result in a sharper fall in spending than forecasted. Recent retail trade figures showing a 0.8% fall m/m in June give weight to the RBA's concern (see chart).
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.