RBA Holds at 4.35%, Ready to Hike if Needed

RBA holds cash rate steady at June meeting as expected, strikes a hawkish tone with rate hikes still on the table.

As was all but universally expected, the RBA Monetary Policy Board (MPB) held the cash rate steady at 4.35% at its June meeting. But in a move that was less surprising to us than to some in the market, it explicitly signalled that further hikes remain on the table.

The final sentence of the media release added the clause “including increasing the cash rate target further if required” to the usual remark about doing what is needed to achieve its policy goals. In the opening statement to the post-meeting media conference, Governor Bullock repeated this point. This drafting decision is unusual for an RBA statement, and a stronger steer than in recent communication. It suggests that the MPB wanted to hose down recent speculation that they are done hiking rates.

We therefore retain our view that further cash rate increases are coming. If we are right that the June quarter result for trimmed mean inflation will again be strong, the next hike will come at the August meeting. A longer pause is possible if the next few inflation prints are less alarming, but the direction of travel is still most likely up. We expect it will take a further unexpected weakening in the domestic economy – and a better inflation outlook – to entirely prevent further cash rate hikes from here.

The post-meeting statement highlighted the RBA’s key view that inflation was too high, and a period of slower growth would be needed to get inflation back to target. The RBA continues to view the Australian economy as facing capacity pressures, and only able to grow by about 2%yr before inflation rises. This is in line with previous RBA messaging, though lower than our own view.

The MPB has not been as spooked by the recent data flow on the household sector and labour market as market pricing implied it would be. The RBA’s forecasts, which were based on an assumed path for the cash rate of one-and-a-bit hikes, already envisaged some slowdown. Indeed, the RBA regards the labour market as still a bit tight at the current unemployment rate, a point the Governor noted in the media conference.

The energy price shock is seen adding to the pre-existing inflation problem. Energy and “most related” commodity prices were mentioned as still being above pre-war levels, and – consistent with our own Market Outlook forecasts – the recovery following resolution of the conflict is expected to be gradual.

The discussion of the real side of the economy was sanguine. The slowdown in consumer spending was “as expected”, comments on the housing market suggested little alarm, and most labour market indicators were seen as “resilient”. In the media conference, the Governor stated that it was too early to say what the effect of recent macro policy changes, including the rate rises as well as the Budget, would be on the housing market.

The tone of the discussion on pass-through of the energy shock to other prices was also more hawkish than previously. The May post-meeting statement described “early signs” that firms were looking to pass through higher costs to their own prices. This month, these were “signs”, not “early signs”, and some of the price increases were noted as already occurring, especially in new housing construction. This language is important given the importance the MPB is placing on ensuring the current energy price shock does not become embedded in ongoing inflation. Also noteworthy in the media conference, the Governor highlighted that firms can only pass on higher costs into their own prices if demand is strong enough that consumers will accept that. The comments in May that passing on costs was “reasonable” were not repeated; rather, pass-through was an “expected” reaction by businesses, especially small businesses given this is “their livelihood”.

Overall, this meeting’s outcome and communication were in line with our existing view of the RBA’s analysis of the economy. The MPB has not been spooked by recent soft data, seeing these outcomes as a necessary part of the slower growth needed to get inflation down. It is more concerned about upside risks to inflation than downside risks. And it is now seeing more pass-through into prices, especially in housing construction, as we first flagged in early April .