Tightening Bias Retained As Persistent Inflation Risk Rises

In June the RBA discussed both a 25bp hike and a pause and while the decision was again “finely balanced”, the “stronger” arguments were for another rate rise. As mentioned in the meeting statement, upside inflation risks and not meeting the target by mid-2025 were the drivers of the June decision. May labour market data was very tight, the other key variables before the July 4 meeting are May CPI on June 28 and retail sales June 29 with Q2 services prices not until July 26.

• The meeting minutes were generally hawkish with the discussion of a hike described before the pause (unlike May), upside inflation risks firmly stated, little spare capacity, reduced risks to global growth and achieving target “drawn out”. While the concluding paragraph removed “further increases in interest rates may still be required”, it added the Board’s “willingness to do what is necessary to achieve” a return to target. The RBA will hike again if it believes it must to achieve its inflation forecast.
• Indexing of wages and prices to the CPI along with sticky services inflation seemed to drive the RBA’s assessment of increased risks to inflation, and thus expectations and rates. Wages can increase in line with inflation only if productivity picks up. Also, there were yet to be signs of easing services inflation and goods prices had moderated less than some other countries.
• Rising house prices were seen to temper the consumer slowdown “in the coming year” and stable home loan approvals indicated that financial conditions may not be as tight as previously thought.
• The arguments to pause tightening included downside risks to inflation from weaker consumption and global markets/shipping, time to assess impact of hikes to date given lags & refis, consumption has slowed significantly and market inflation expectations are little changed.