MNI STATE OF PLAY: Inflation To Drive Another RBA Hike

Inflation momentum and the normalisation of monetary policy following the unprecedented levels of accommodative support through the pandemic lockdowns are expected to prompt a second interest rate rise in as many months from the Reserve Bank of Australia at its board meeting this week.

The RBA is expected to hike the official cash rate, currently at 0.35%, by either 25 basis points or a heftier 40 basis points at Tuesday's meeting as it continues the cycle of tightening begun in May, (See: MNI STATE OF PLAY: RBA Could Take Rates To 2.5%, Says Lowe).

INFLATION VIEWS

RBA Governor Philip Lowe said in May, after the bank increased rates for the first time in a decade, that he expected official rates would reach around 1.5% by the end of the year and up to 2.5% over time. The central bank is looking to control rising inflation as CPI has surged to 5.1% to the end of March this year from 1.1% in March 2021, the highest in a more than a decade.

Trimmed mean inflation, the RBA’s preferred measure as it sets its target of 2% to 3%, is now at 3.7% to the end of the second quarter, and data this week from the Melbourne Institute showed its gauge of trimmed mean inflation at 0.7% in May, the highest monthly reading since 2009.

RBA forecasts for inflation have continued to be moderate, however, with the latest Statement on Monetary Policy forecasting trimmed mean inflation will fall to 3.1% by the end of next year and to 2.9% by June 2024, when it would be back inside the target band.

While the RBA has been transparent that it is now in a tightening cycle the bank’s forecasts and language still remain less hawkish than the market with uncertainty around growth, with the market anticipating both higher inflation and a higher level for official rates over the medium term in this current cycle.