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Standard Chartered’s Nicholas Chia expects the Reserve Bank of Australia (RBA) to keep the cash rate at 4.35% at its 11 August meeting, with no further hikes this year. Q2 core inflation and short-term expectations have eased, while the labour market has softened. However, the bank warns that another rate hike in Q4 remains a risk if demand does not slow sufficiently.
RBA seen on extended hold stance
“We continue to expect the Reserve Bank of Australia (RBA) to keep the cash rate unchanged at 4.35% at its 11 August meeting (see RBA – Caution rules the day). Q2 trimmed mean inflation held steady at 0.8% q/q – as we had expected – and below the RBA’s prior forecast (0.9%). This, together with the recent retracement in oil prices, should take the pressure off the RBA to tighten policy further in the near term.”
“Governor Bullock, in her most recent speech, referenced the unfavourable starting point for the economy in terms of excess demand and a positive output gap as reasons to remain cautious. We would point out that economic momentum appears to be slowing, evidenced by a softening labour market amid a rising unemployment rate in June, although stable job vacancies and robust employment growth still indicate some tightness in the labour market. Short-term inflation expectations fell in July below pre-war levels, but are likely too high for the RBA’s comfort.”
“Housing prices posted a sizeable decline in July, likely reflecting the lagged impact of the cash rate hikes, and lingering uncertainty over budgetary tax changes.”
“Our base case remains that the RBA is done with rate hikes in the foreseeable future. The risk to our view is skewed towards another RBA rate hike in Q4, if the central bank remains unconvinced that demand is slowing sufficiently to contain underlying price pressures.”
“The decline in oil prices in June could partially account for the rebound in consumer confidence alongside robust growth in household spending in June, particularly in air travel and recreational spending. The services PMI also rebounded to a six-month high in July, led by growing new orders and output price inflation rising at levels last seen in April/May.”
