RBA inflation concerns signal another rate rise in July
The RBA made clear this week in delivering a further quarter percentage point rate increase, that it’s worried about the risk of inflation expectations moving higher, and that signals to us that another rate rise is on the cards for July.
The June meeting was always going to be a 50:50 decision, and the governor’s accompanying statement stressed the importance of ensuring confidence that inflation will come back under control.
The decision came in the context of the recent minimum wage decision, for an increase of 5.75 per cent, alongside some other public sector wage changes that suggest the RBA may have more pressure around wages to fight against.
We think that by August the RBA will have sufficient evidence that the economy is slowing enough to bring inflation under control that it can go on hold.
The national accounts update, which came the day after the RBA decision, makes for confronting reading as far as the consumer goes, indicating that growth is likely to be pretty weak going forward. Household incomes are clearly under intense pressure from the triple whammy of higher inflation, higher interest rates and a significant drag from fiscal measures.
But still, there will be areas of concern for the RBA around weak productivity growth and persistent inflationary pressures. That adds to our view that a further rate hike is likely in July to bolster confidence that inflation will return to the 2-3 per cent target range by the end of next year.
