The RBA is set to leave the cash rate on hold (4.35%) today for the second meeting in succession (decision due 1430 AEST). Markets consider a hold as a done deal but price the chance of one further hike this year at around 50%. The RBA's main concern is that higher fuel and energy prices will add to existing capacity pressures and keep inflation running persistently above the 2-3% target band. However, recent data showed inflation was weaker than expected, while financial conditions have tightened this year following three RBA rate hikes, with the Australian dollar up more than 5% on a trade-weighted basis and the 3-year government bond yield now 40bps higher. This takes some of the pressure off the RBA to tighten again, though it will maintain a hawkish bias.
The Monetary Policy Board voted unanimously (9-0) to pause its tightening cycle in June following three straight rate hikes, leaving the cash rate at 4.35%. Having wound back all of last year's rate cuts, the RBA judges policy is now 'somewhat restrictive'. However, seeing signs of second-round effects from higher fuel prices adding to already elevated inflation, the decision statement noted the Board was open to 'increasing (rates) further if required'.
Turning to today's meeting, the expectation is that the cooler-than-expected inflation report for June buys the RBA more time to assess developments. The key quarterly CPI figures showed headline inflation was 3.9% year-on-year and the trimmed mean (or core) rate was 3.6% year-on-year, with both outcomes below the RBA's forecasts for 4.8% and 3.8% respectively.
That potentially opens the door for the RBA to lower its inflation outlook in the August Statement on Monetary Policy (published alongside today's rates decision), breaking the recent pattern of upward revisions. However, inflation is still above the 2-3% target band, and there are upside risks given the uncertainty around a resolution in the Gulf and with the federal excise tax cut on fuel now having ended.
Meanwhile, economic growth and the labour market have remained robust. Governor Bullock continues to point out that demand needs to slow to bring inflation back to target. Growth is on track to outpace the RBA's expectations through the first half of the year, with the data centre buildout and resilient household spending key drivers. The labour market has been difficult to get a clear read on of late, but commentary from RBA officials suggests conditions are still viewed as tight. Employment growth has been solid; however, the unemployment rate averaged 4.4% in the June quarter - a little higher than the RBA forecast (4.2%).
All considered, another hawkish hold from the RBA appears on the cards. The recent inflation data should allow the Board more time to observe developments but expect it to retain the message that rates could still increase given inflation remains above target with risks to the upside, while growth and the labour market have been robust.
