MNI STATE OF PLAY: Lower Inflation Print Could Limit RBA Hike

The Reserve Bank of Australia board meets this week with expectations of a fourth interest rate rise in as many months, although lower than expected inflation data last week could see the central bank stop short of a bigger 75 basis point hike.

The RBA on Tuesday is expected to hike by 50 basis points, bringing the Official Cash Rate to 1.85%, after CPI inflation last week printed at 6.1%, (See: MNI INTERVIEW: Fuel Has Wider Impact on Australian Inflation).

Although this was the fastest yearly growth since 2001, some forecasters were expecting a much higher result.

A bigger than expected inflation result could have brought a 75bps rate hike this week into play, but the 6.1% figure is likely to see the RBA continue hiking in increments of 50bps for the time being, (See: MNI STATE OF PLAY: Household Spending A Factor For RBA Hikes).

WHAT LIES AHEAD

While the RBA has abandoned forward guidance on interest rates and says it is now “data driven', more indications on how high official rates could go are expected this Friday when the RBA publishes new forecasts on inflation in the latest Statement on Monetary Policy.

RBA Governor Philip Lowe said in July that he expected inflation would peak at “around 7%” this year before declining, and the SoMP will reveal if these forecasts have been revised.

He also said he believed neutral rates to be at around 2.5% currently.

Australian Treasurer Jim Chalmers, in an economic update last week, said inflation would reach 7.75% this year before falling back.

After focusing strongly on wages growth during the pandemic lockdowns as it sought to return inflation to its 2% to 3% target, the RBA is now exclusively focused on inflation and is sanguine on issues such as falling house prices, with the prime Sydney market down 2.2% in July for its worst decline in almost 40 years. The national average was a fall of 1.3%.

The bank believes that a large majority of mortgage holders can cope with increased rates as many have built up cash buffers or are ahead in their payments, (MNI INSIGHT: RBA Confident Of Avoiding Recession As Econ Cools).

Other economic data continues to be strong, with unemployment at a five decade low of 3.5% and growth is at 3.7% after a 0.8% gain in the first quarter.