Australia’s Sticky Inflation Revives RBA Rate Hike Bets After Board Split
Australia’s Sticky Inflation Revives RBA Rate Hike Bets After Board Split
Australia’s inflation rate eased in July, but the slowdown was not enough to remove pressure on the Reserve Bank of Australia to consider another interest-rate increase.
The Consumer Price Index rose 3.5% in the 12 months to July, down from 3.8% in June, the Australian Bureau of Statistics said. However, the trimmed mean, the RBA’s preferred measure of underlying inflation, remained at 3.6%, unchanged from June and still above the central bank’s 2% to 3% target range.
The figures came as markets were already reassessing the outlook for Australian interest rates following the release of the RBA’s August meeting minutes.
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RBA Board Had Considered a Rate Increase
The RBA left its cash rate unchanged at 4.35% at its August 11 meeting, but the decision followed a discussion over whether monetary policy needed to be tightened further.
The board ultimately voted unanimously to keep the rate at 4.35%. However, the minutes showed that members had different views about the need for another increase, with some seeing a case for raising rates if inflation risks remained elevated while others preferred to wait for more evidence.
That discussion has taken on greater importance after the July inflation data showed that underlying price pressures had not eased.
The RBA has previously indicated that it wants inflation to return sustainably to the middle of its target range. With trimmed mean inflation still at 3.6%, policymakers have limited room to declare the inflation problem resolved.
July Inflation Fell, But the Details Were Less Comfortable
The 3.5% annual CPI increase represented an improvement from June’s 3.8% reading.
But the underlying measure told a different story. Trimmed mean inflation remained at 3.6%, meaning the measure that removes unusually large price movements showed no improvement from the previous month.
The persistence of underlying inflation matters because the RBA’s policy decisions are based on whether price pressures are likely to remain elevated rather than on the headline CPI number alone.
Rate Hike Expectations Strengthen
Financial markets and economists have increased their attention on the possibility of another RBA increase following the inflation figures and the August board discussion.
Westpac said on Friday that the probability of a rate hike had increased, although it did not consider a hike the most likely outcome.
Forecasts among Australia’s major banks have also moved in different directions. NAB is expecting a 25-basis-point increase at the September 28–29 meeting, while Commonwealth Bank and ANZ are forecasting a hike later in the year. Westpac remains more cautious and expects the next move eventually to be a cut.
The differences underline how uncertain the rate outlook has become.
A further increase is, therefore, not a decision the RBA has announced. It remains a possibility that will depend on incoming inflation, spending, employment, and other economic data.
September Decision Comes Into Focus
The RBA’s next monetary-policy meeting is scheduled for September 28–29.
The central bank enters that meeting with the cash rate at 4.35%, headline inflation at 3.5%, and trimmed mean inflation at 3.6%.
For policymakers, the central question is whether the recent easing in headline inflation will continue and eventually pull underlying inflation lower or whether persistent domestic price pressures will require another increase in borrowing costs.
The August meeting showed that a rate hike is already part of the RBA’s policy debate. The July inflation figures have given markets another reason to keep that possibility in view.
For now, the RBA has not signaled that a September hike is certain. The next move will depend on whether the data provide enough evidence that inflation is moving back toward the 2% to 3% target range.
Source: Bank Of Australia
