- RBA meets amid uptick in Australian inflation
- Muddied economic outlook may complicate policy path
- Aussie remains choppy ahead of Tuesday’s decision (04:30 GMT)
Inflation setback
The Reserve Bank of Australia is no stranger to policy flip-flops and the May decision may just add to the tally. Having dropped their tightening bias as recently as the last meeting in March, policymakers are staring at an unpleasant inflation picture.
The monthly CPI reading ticked up to 3.5% y/y in March, while two closely watched underlying measures came in hotter than expected in the first quarter. Moreover, despite the labour market having somewhat cooled over the past year, wage growth has kept on accelerating, reaching 4.2% y/y in the fourth quarter of 2023.
The Q1 figure for wage costs isn’t due until May 15 and the next CPI report will be released even later on May 29. Both pieces of data could be crucial to deciding whether the latest setback in the fight against inflation is just a blip or a warning that monetary policy is not restrictive enough.
Focus on new CPI forecasts
Without the additional data, however, the RBA will probably maintain a neutral stance in May, keeping the cash rate at 4.35%. But the Bank will also publish its quarterly Monetary Policy Statement containing updated economic projections. In the previous report, the Bank did not see inflation falling within its 2-3% target band before the end of 2025.
It’s unlikely that Governor Michelle Bullock would tolerate any further delay to meeting the inflation goal so the new forecasts may well provide a vital clue to future policy even if there’s little modification to the statement.
Economic growth has been patchy
Looking at the economy more broadly, recent indicators support a wait-and-see approach by the RBA. Employment unexpectedly fell in March while the jobless rate crept up slightly. Retail sales also defied forecasts of an increase, suggesting consumers remain cautious about spending.
But there’s been a marked improvement in the services PMI since December and the housing market is booming again. More importantly perhaps for Australian exporters, China’s economy seems to be on a steady path to recovery.
Yet, none of the above pose an outsize danger to inflation, so the main debate for board members will more likely be about how comfortable they are to let CPI run above the target for a prolonged duration rather than how to contain a resurgence.
Aussie stuck in a downward trajectory
If there is a hawkish tilt and the RBA reinstates its tightening bias, the aussie could recover above its moving averages and challenge the descending trendline around $0.6590. A step higher would bring the April peak of $0.6644 into range before attention shifts to the $0.6700 level.
In the scenario that the RBA overlooks the latest signs of price stickiness, the aussie could head back towards the April trough of $0.6360 before revisiting the October low of $0.6268.
Is there a risk of a surprise rate hike?
With sticky inflation in the US also proving problematic for the Fed, there’s already been a sharp repricing of rate cut expectations for the major central banks. For the RBA, investors have gone a step further and priced in around a 40% probability of a 25-basis-point rate increase by year end. Hence, a hawkish tone alone might not necessarily spur a significant reaction in the markets on Tuesday.
However, it is worth considering Governor Bullock’s greater urgency in beating inflation compared to her predecessor. So a surprise rate hike cannot be completely ruled out, particularly as policymakers have the option of a smaller increase of 15 bps at their disposal.
