Today's RBA meeting shapes as another finely balanced decision for the Board between leaving the cash rate on hold at 4.1% or hiking rates by 25bps. After pausing its tightening cycle in April, upside risks to inflation prompted a hawkish turn from the Board that caught markets offside as 25bps rate hikes were delivered in May and June. Markets interpreted a deceleration in Australia's monthly inflation indicator in May as increasing the chance of the Board leaving rates on hold, but a 25bps hike seems the more likely outcome today.
Since its meeting last month, the RBA's messaging has been consistent around the theme of acting with monetary policy to ensure inflation falls back to the 2-3% target ''within a reasonable timeframe'', projected currently to be in 2025. Recent speeches from Governor Lowe and Deputy Governor Bullock have highlighted that risks to achieving that objective have increased given developments it has observed in services inflation, wage and price settings and in housing prices. The rate hikes in May and June were justified as helping to address those risks, but there has been no indication from the RBA that rates have peaked. That view is informed by the Board retaining the guidance that "some further tightening of monetary policy may be required..." in light of the incoming data.
Key recent data points look consistent with the Board hiking rates further today. A fall in headline inflation in the monthly indicator to 5.6% in May (13-month low) will be welcomed; however, a hawkish Board will probably put more weight on the measure excluding volatile fuel and holiday travel prices, which was more elevated at 6.4% and only a tick lower than April's reading (6.5%). Labour market conditions, meanwhile, remain very robust with employment surging to a 75.9k rise in May that saw the unemployment rate decline to 3.6%, around historic lows. Those developments, I think, will persuade the Board into another 25bps hike.