August hangs in balance after July rate hold

GSFM’s Investment Strategist, Stephen Miller, has forecasted a further two 25-basis-point interest rate increases by year-end in order to return inflation to the Reserve Bank of Australia’s (RBA’s) target within an “acceptable timeframe”.

While the decision to halt its rate hiking cycle for the month of July and hold the official cash rate at 4.10 per cent “was a surprise to some”, Miller said that a ‘skip’ in July is not “unreasonable” for the RBA to assess economic conditions while considering the delay in effectiveness of monetary policy.

“The tone of the Statement appeared more directed toward an enunciation of the downside risks to growth rather than the upside risks to inflation which were much more prominent in the May and June Statements,” he said.

“That may have reflected the fact that the Statement attached to a decision to leave the policy rate unchanged rather than attaching to increases, as was the case in May and June, and the Statement was a long way from a worrying sanguinity on the outlook for inflation.

“The greater frequency of RBA Board meetings compared with their developed country counterparts (monthly as opposed to every 6 weeks) [is also impactful]. The RBA will go to 6-week cycle with the implementation of the recommendations from the recent RBA review – an RBA fit for the future.”

However, the combination of inflation not returning to the current two to three per cent target range until mid-2025, the recent Fair Work Commission (FWC) decision to increase the award rates of pay by 5.75 per cent, recent regulatory changes to the industrial relations framework and challenges with housing rents presents several “domestic developments [that are] of some concern to the RBA” as it continues to tackle its pathway to return inflation to target.

“The forgoing leads me to conjecture that the policy rate will need to be in the “high 4s”, implying probably another two 25 basis point (bp) policy rate increases between now and year-end to bring inflation back to the 2 to 3 per cent target zone within an acceptable timeframe while at the same time minimising the dislocation in activity growth and employment,” Miller said.

“Turning an eye to the 1 August meeting, the likelihood of an increase is critically dependent on what the June quarter consumer price index (CPI) (released on 26 July) reveals, and further assessment of the inflation pressures spawned by the FWC decision.

“A trimmed CPI mean outcome greater than the current RBA forecast of 1.1 per cent quarter-on-quarter or 6.0 per cent annual likely means a further increase.”