Rate Hike Discussed Again, But “Challenging Time”

Governor Bullock has just answered questions and emphasised that currently the economy is in a “complex situation” and it is not so “obvious” what the RBA needs to do now. Restrictive monetary policy is working but the return of inflation to the band is going to be “slow”. A rate hike was discussed for the second straight meeting not because the case for one has risen but the Board is more “alert” to certain things. There will be an update of the view at the August 6 meeting following Q2 CPI and new forecasts.

• Bullock reiterated that the data had been mixed but warranted vigilance and that labour market conditions remain quite strong. The economy is still on the “narrow path” but the Board needs “a lot to go our way” and the path is now “narrower”. The goal is to avoid a recession.
• High inflation signals that demand continues to exceed supply. But inflation expectations remain anchored.
• The Board is not closer to a rate hike and it continues to forecast inflation within the band in H2 2025. Bullock said that the use of the term “vigilant” is not a signal for imminent tightening. The upward revisions to consumption and downward to the savings rate, plus the overall fiscal impulse are on the “alert list” but downside risks remain as well.
• There are a lot of uncertainties around consumption with the reason for the lower savings rate unclear – spending more of income due to cost of living or because income rising and feeling more confident? Discretionary spending is flat and per capita consumption is negative though. But with the expected pick up in real disposable income, consumer sentiment should improve too.