RBA Preview: Forecasts from 10 major banks, decision looks like a close call

We expect the RBA to leave the cash rate unchanged in August. While we won’t completely rule out an August hike, we think the case for a pause is stronger: inflation is moderating faster than the RBA expected, consumer spending is slowing, and the RBA described monetary policy as ‘clearly restrictive’, in its recent minutes. 

We expect the RBA to resume hiking by 25 bps though it is a fairly close call with analysts almost evenly split on the decision and OIS only pricing in 20% chance of a hike. To justify a hike, the RBA could use the updated economic forecasts to highlight upside inflation risks from the red-hot labour market, rebound in housing activity and strong population growth.

The RBA can use the latest inflation data as an excuse to leave the cash rate target unchanged at 4.1% this month. Our current thinking is that the bank will maintain rates at the current level until September, which could respond to inflation backtracking higher, or just not making sufficient downward progress. The latest data from the Australian Bureau of Statistics shows that the CPI for the second quarter fell to 6.0% YoY, lower than the 6.2% consensus. This is also the lowest quarterly rise since September 2021. As both headline and trimmed mean inflation are now below the central bank’s forecast, this gives it a good reason to believe that it is time to stop.

We expect the RBA to maintain its cash rate target of 4.10% which would mark a two-month ‘pause’ since the July meeting. The policy statement is unlikely to differ much from July. It will probably suggest that the tightening cycle has not yet ended, and cite developments in the global economy, trends in household spending and the outlook for inflation and the labour market as the key factors influencing policy decisions. We maintain our base-case scenario that the RBA will implement one more 25 bps hike toward a terminal policy rate of 4.35%.  

Although we expected the last two rate hikes, the most recent decision to pause was a surprise. With inflation cooling in recent months, but still well outside the 2%-to-3% target and retail sales slumping, we judge that the central bank is nearing the end of its rate hike path. Once again, we will go against consensus. We look for the RBA to finish off with a more moderate rate hike of 15 bps; but given the unpredictability of Governor Lowe, will not be shocked if we are wrong.

The RBA is expected to hike by another 25 bps this week in its August Monetary Policy Board meeting though we do see a risk that the Bank may once again pause to re-assess impact of the current hikes to date. Friday’s weaker-than-expected Australia retail sales result and Q2 CPI earlier in the week certainly increase the odds of a hold. But upward revisions to wages and employment, but minimal revisions to inflation could imply at least two more rate hikes.

We think Australia's central bank could hold its policy rate steady for a second straight meeting at 4.10%. While it is possible the peak in the policy rate has already been reached, the outlook remains fluid, and we remain flexible. In particular, if progress with respect to slowing price and wage inflation were to stall, the RBA could easily resume hiking rates in the months ahead. 

The RBA will raise the cash rate by 25 bps to 4.35%. Given the lasting stickiness in services inflation, the RBA should take out more ‘insurance’ with a 25 bps increase in August, reaching a terminal rate of 4.35%. Thereafter, the Board can retain a tightening bias while assessing inflation’s downtrend and the evolution of risks. 

We expect a hold while retaining a tightening bias.

The RBA is aware that rates are ‘clearly restrictive’, and there is a chance they remain on pause at 4.10%. However, we look for a further 25 bps rate hike, keeping in mind that inflation rates remain substantially above the RBA’s target band of 2-3%. The decision will nonetheless be a close call.