MNI STATE OF PLAY: RBA To Keep Hiking in Inflation Battle

The Reserve Bank of Australia signalled a move into restrictive monetary policy territory over coming months after hiking rates by 50 bps to 2.35% and abandoning its language around the "normalisation" of policy as it finally closed in on its estimated neutral rate.

Tuesday's lift in the Official Cash Rate (See MNI STATE OF PLAY: RBA To Hike 50 As Inflation Stays Priority) to a near eight-year high marks the most aggressive monetary tightening since 1994, with a cumulative 225 bps of hikes since May showcasing the RBA's determination to bring inflation back to its 2-3% target range. The Bank's intent was underscored by a shift in language to its being "committed" to combating inflation from viewing it as a "high priority" in August.

With the fifth hike in as many meetings aligning monetary policy with its estimated nominal neutral rate of 2.5%, those hoping for a dovish tilt would have been disappointed as the RBA telegraphed it would lift rates "further over coming months", caveated by an echo of August's statement that it is not on a "pre-set path". The Australian dollar was little changed after the announcement, which was in line with expectations.

Finer detail of the Bank's thinking may come in Governor Philip Lowe's speech on Thursday, a day after the release of second-quarter GDP data (See AUSTRALIA DATA: Trade Data Suggests A Good Q2 GDP Report). While jobs and retail sales data have been resilient, some forward indicators have signalled weakness ahead.

Having spent 2021 and early 2022 linking monetary policy expectations to then yet-to-be delivered wages growth, Tuesday's RBA statement hinted at a wary eye now being cast over the gathering momentum in labour costs at a time when tamping down inflation is the top priority.

MONITORING LABOUR COSTS

The Bank added new language about pockets of "briskly" rising labour costs and said it would "pay close attention to the evolution of labour costs." The wages component of the June quarter Business Indicators released on Monday rose 3.3% quarter-on-quarter - the fastest pace since 2008.

While the RBA argues medium-term inflation expectations remain "well anchored", the price outlook over the remainder of the year remains challenging.

Policymakers reiterated that they will be "guided" by incoming data. The RBA expects inflation to peak at 7.75% by the end of the year compared to the June quarter Consumer Price Index print of 6.1%.

While the Bank nodded to softer commodity prices and the easing of supply chain issues, inflation will be buoyed by higher electricity, gas and fuel prices over coming months.

Electricity and gas account for 3.5% of the CPI basket and the Bank's Statement of Monetary Policy said it expects household electricity prices to increase “significantly” in the September quarter. Fuel prices are set to rise as Federal Treasurer Jim Chalmers ends a AUD22 cents a litre cut in the fuel excise from Sept 29.

While the RBA has so far been unfazed by four consecutive months of declining house prices, the statement noted the full effects of higher interest rates were "yet to be felt" in mortgage payments.

Rising cost of living pressures and steeper mortgage rates will start to bite. Commonwealth Bank, whose mortgage book dominates 25% of the Australian market, says there is a three-month lag between a rate hike and when standard variable rate mortgage borrowers feel the impact.

On that arithmetic, there will a lot more pain should the official rate top 3% by the end of the year as suggested by the futures market.