Preview: Another push on the brake pedal for the RBA in July
As the RBA gears up for its upcoming meeting, anticipations are high and in the midst of mixed data and looming inflation concerns, we're making the call for anther 25bp rate increase.
As we approach the Reserve Bank of Australia's board meeting on Tuesday, the 4th of July, the financial landscape holds its breath. Bucking the consensus, we project an audacious move from the RBA—a 25bp hike in rates, pushing the official cash rate to 4.35%.
Navigating mixed data
At its meeting in June, the RBA raised the cash rate by 25bp from 3.85% to 4.10%. While the move surprised the broader market, it aligned with our expectations due to the RBA's increased concern around elevated inflation, rising unit labour costs, wages, and poor productivity.
"While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued."
The RBA retained its tightening bias and noted that a further tightening of "monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."
RBA cash rate chart
What's to be expected?
Since the June meeting, the data that has followed has been mixed. On the more hawkish side of the ledger, employment (+75.9k vs 15k exp) and retail sales (+0.7% vs 0.1% exp) were stronger than expected.
However, the monthly CPI indicator missed expectations (5.6% vs the 6.1% exp), as did Q1 2023 GDP (+0.2% vs 0.3% exp). The minutes from the RBA's recent board meeting were less hawkish than feared, omitting forward guidance that further hikes may be needed.
On balance, due to the RBA's ongoing concerns around inflation, wage growth, subdued productivity, resilient consumer spending and other global central banking peers sounding more hawkish, we look for the RBA to raise rates tomorrow by 25bp to 4.35%.
This is an out-of-consensus call with the market pricing in just a 22% (5bp) chance of a 25bp rate hike.
Market pricing of the RBA's terminal peak rate rose stands at ~4.53%, reflecting an expectation of two more rate hikes before year-end, taking the RBA's official cash rate to 4.60%, which is in line with our expectations.
ASX 30-day interbank cash rate futures implied yield curve
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