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Inflation uncertainty keeps RBA on high alert

04:00pm June 19 2024

The Reserve Bank of Australia left the cash rate unchanged at 4.35 per cent at its June Board meeting, as expected. 

The Board continues to rule nothing in or out in terms of future policy action, but the tone of the statement and comments from Governor Michele Bullock suggested a step up in concerns about the upside risks to inflation.

“Uncertainty” was a noticeable feature of the statement - the word cropping up more times than in any other statement of the past six months. Specifically, the Board has become less certain that price pressures are moderating as it would like.

The stickiness of price inflation in the services sector in particular is giving them pause for thought. 

Importantly, the Governor revealed that at the latest meeting the Board discussed a potential increase in the cash rate, as well as keeping the rate on hold, but did not consider a cut. 

She also said that the bank needs a lot to go its way to bring inflation down to the 2-3 per cent target range, and that the economy’s narrow path – to getting inflation down while averting a recession - is getting a bit narrower. 

While the case for an interest rate rise is not yet increasing, the Governor said that there were a few factors making the Board more attentive to the upside risks. They include consumption, the labour market, and the monthly inflation numbers. 

What that means is that the economic data between now and the next Board meeting on Aug. 6 will be critical - none more so than the June quarter inflation report on July 31.

Some analysts see this inflation print as crucial in determining whether August becomes a live meeting for a rate rise, but swap markets have little chance of a hike priced in. 

Westpac economists’ forecast for June quarter inflation is below that of the RBA’s, leaving us comfortable with our house view that the next move in the cash rate will be down, and arrive at the November meeting.

Still, we acknowledge that there is now a greater risk of rate relief not coming until next year, and market expectations for the timing of the first rate cut have been pushed out from February to April 2025.

If the concerns around persistent price pressures continue we think the RBA is more likely to keep the cash rate on hold for longer rather than hike again. 

Economic data holds the key to how this plays out, with focus squarely on the June quarter inflation report. 

To read Besa’s full note, visit WestpacIQ.

Besa is the Chief Economist of Westpac’s Business Bank. She is also the Chief Economist of St.George Bank, Bank of Melbourne, BankSA and BT, which are other businesses within the Westpac Group. Besa has been with the group since 2009 and is a key spokesperson on the economy and financial markets. She manages a team of economists, regularly presents to clients and appears in the media. Besa is also Chair of the Australian Business Economists organisation and a member of ANU’s Centre for Applied Macroeconomic Analysis RBA Shadow Board. Besa was appointed the Chief Economist of St.George Bank in 2008, a role which saw her become the first female Chief Economist of a bank in Australia. Prior to this, she worked at the CBA and Colonial. She has previously lectured for the Kaplan Business School and written a regular property column for the Weekend Australian.

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