The RBA faced a line-ball decision today and we believe made the right call to pause. But with inflation still higher than the Board’s target, especially ‘sticky’ services inflation, the relief may be short-lived for mortgage-holders. We see at least one more rate rise in the next 2-3 months.
Last week’s June quarter CPI figures, which fell more sharply than expected, were probably the deciding factor in today’s decision to hold.
Other factors would have included:
- With the Board aiming to minimise the increase in unemployment (while maintaining its full commitment to returning inflation to target) opting for a more gradual approach to interest rate rises reduces the risk of over-tightening and allows for a careful observation of the full lagged effects of monetary policy. It also gives the RBA an opportunity to await more data to assess the extent of wage pressure in the economy before taking further action.
- We are starting to see increasing evidence of a cooling economy. Last Friday’s figures, showed that in June 2023, retail turnover fell by 0.8% – faster than anticipated. Retail trade in real terms is therefore expected to fall for three consecutive quarters, following the decreases of 0.6% and 0.3% in the March quarter 2023 and the December quarter 2022 respectively. The Governor’s statement observed that the Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while.
- Mortgage stress is also a concern as more households on low fixed rate mortgages will need to refinance with higher rates.
But looking ahead, there may well still be additional tightening. This is because:
- Services inflation remains high and has not shown signs of easing. Additionally, there are also greater signs that wage settings behaviour and expectations are changing. The WPI is currently at the highest level in the past decade and is expected to continue to rise over the coming months. Stronger wages growth is also contributing to higher services inflation.
- International central banks continue lift interest rates as they seek to return inflation to target. Importantly, core inflation yet to track lower fast enough in most jurisdictions. With recent rises by the US Federal Reserve and European Central Bank, the widening of the interest rate gap would create further inflationary pressures in Australia, primarily through higher imports costs.
- So far, the jobs market has shaken off the rate rises. Unemployment rate in June remained at 3.5%.
- The housing market has experienced a turnaround, primarily driven by substantial growth in population and nominal labour incomes, coupled with challenges in constructing new dwellings. If the housing market's strength persists, it is expected to support household consumption and weaken the effects of monetary policy.
Given the RBA's commitment to achieving a 3% inflation rate by mid-2025, the path to reach this target is likely to require at least one further cash rate increase in the next 2-3 months. But the timing of this will be dependent on real-time data on inflation and employment and other measures that reveal if slack in the economy is emerging. Monthly ABS data will become more important in this decision making process, as the RBA will not want to wait for quarterly data to reassess whether and when it needs to tighten the cash rate further.
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