Inflation risks remain, but remarks from the governor point to a 25-50bps hike range.
The Reserve Bank of Australia meets this week with few doubts that the interest rate hikes it began in May will continue as it moves to normalise monetary policy with a careful eye on inflation risks.
The RBA’s overnight cash rate currently stands at 0.85% after a surprisingly large 50 basis point increase in June, and the bank is likely on Tuesday to consider either a 25 or 50 basis point increase at the board meeting to take rates through the 1% threshold.
A 75 bps increase is considered unlikely following comments by RBA Governor Philip Lowe at a Bank of International Settlements event earlier this month, when he largely ruled out the chances of the bigger hike, (See: MNI INSIGHT: 75 Basis Points Hike Unlikely For RBA).
FORWARD GUIDANCE AND DATA
He said the fact that the RBA meets monthly means that it can increase rates in smaller increments than other central banks. The RBA has abandoned forward guidance and now says it will be data driven, although there have not been any significant data releases from the Australian Bureau of Statistics since the last meeting in June.
Building approvals data from the ABS on Monday showed a seasonally adjusted 2.4% fall in May dwelling approvals, suggesting that rising interest rates are already putting the brakes on the economy. Retail trade, international trade and payroll data is due later this week, but the next ABS inflation data is not until July 27.
The RBA’s own data, released last week, showed a different picture in that credit demand remained steady in May and is growing at an annualised 9%.
The central bank has been relying more on its liaison research programmes, which deliver more time sensitive data, and wages data gleaned from the source was used to justify the May rate hike.
The RBA’s current stance is that it will do all it can to combat inflation, which is currently at 5.1% against the 2 to 3% target range. Underlying inflation, the bank’s preferred measure, is at 3.7%.