The RBA's Monetary Policy Board (MPB) is expected to stick to sequence today by reverting to holding the cash rate steady (3.6%) following a 25bps cut at its previous meeting. This gradual, cautious approach has seen the MPB deliver 75bps of cuts since the start of the year, and markets expect the easing cycle has further to run pricing in another 1-2 rate cuts. Inflation remains in the driving seat for policy, though there have been recent signs of cooling in the labour market. The MPB has tied rate cuts to progress in the key quarterly inflation data, and with the next report for Q3 not due until October 29, it will likely switch back to wait-and-see mode today.
The MPB goes into this meeting having cut rates by 25bps in a unanimous decision (9-0) last time out, which followed 25bps cuts in February and May. Headline inflation slowing to 2.1%Y/Y and 2.7%Y/Y on a core or trimmed mean basis in the June quarter CPI report gave the RBA increased confidence that its forecast trajectory for inflation to settle around the midpoint of the 2-3% target band remained on track. At last week's parliamentary testimony, Governor Bullock summed the situation up by saying that the MPB was in a 'very good position on inflation'. However, there is likely to be some caution expressed today due to the monthly CPI indicator rising through July and August, pointing to upside risks to quarterly inflation.
In the labour market, while employment growth was acknowledged to have slowed, Governor Bullock's view was that conditions remained broadly consistent with its full employment objective. The RBA's updated forecasts last month showed the unemployment rate is expected to tick up slightly to 4.3% and then hold at that level over the next couple of years. The main risk is that unemployment creeps a little higher if employment growth continues to remain lacklustre. However, signs of a long-awaited recovery in consumer spending drove GDP growth to 0.6% in the June quarter, lifting year-ended growth to 1.8% - slightly above the 1.6% pace forecast by the RBA. If this momentum can be sustained, that bodes well for the labour market outlook.
