The RBA goes into the August meeting looking over persistent inflation, a robust labour market and an uncertain economic outlook. Conditions are not yet at a stage where the RBA can start talking about rate cuts; however, it will likely want to avoid sounding overly hawkish with 5 other G10 central banks already easing monetary policy and the US Federal Reserve potentially joining that group with a frontloaded cut in September. Today's decision (due at 14:30 AEST) should see the Board leaving the cash rate on hold at 4.35%, unchanged since last November.
For much of the intervening period since the 18 June meeting, the speculation has been whether or not the RBA would raise rates in August. Market pricing for an August hike climbed to more than a 50% chance following the May CPI report (released 26 June) that showed an uptick in the monthly gauge to 4%. But markets have subsequently priced out any chance of an RBA hike and are now weighing up the timing of the first cut. Two factors have been key here. Firstly, cooling inflation data in the US and an increasingly dovish Fed have had spillover effects on rates pricing globally and in Australia. Secondly - the more influential factor - last week's quarterly CPI print for Q2 did not produce the upside surprise to warrant a hawkish revision to the RBA's outlook for returning inflation to the midpoint of the 2-3% target band in 2026, the logical threshold for a justifying a rate hike.
The Q2 report showed headline CPI came in at 1% quarter-on-quarter and 3.8% year-on-year while the trimmed mean or core rate was 0.8%q/q and 3.9%Y/Y. Those outcomes compare to the RBA's May forecasts of 3.8% year-on-year inflation for both headline and core CPI. Essentially, inflation is where the RBA expected it to be and the August forecasts in the Statement on Monetary Policy (released alongside the rates decision) will take into account the range of cost-of-living support measures announced by governments at the federal and state levels over recent months. These initiatives will lower measured inflation over the coming year or so, another factor behind the pricing-out of prospects for an August rate hike.
Overall, the strategy reaffirmed by the RBA as recently as the June meeting of gradually returning inflation to target to preserve the labour market is still the way forward for the central bank. Labour market tightness is easing and the forecast for the unemployment rate to rise to 4.3% over the coming year is unlikely to shift much based on the recent data. The most likely path for the RBA today appears to be to maintain the line that it has held since March that it is 'not ruling anything in or out' but to reiterate that it will 'remain vigilant to upside risks to inflation'.
