CORRECTED-MNI RBA WATCH: Board Set To Cut As CPI, Labour Ease

The original article published Friday Aug 8 used trend employment instead of seasonally adjusted data. 

The Reserve Bank of Australia Board is likely to lower the 3.85% cash rate by a further 25 basis points at its August 12 meeting, as inflation continues to ease and unemployment edges higher.

A reduction would mark the third cut this year and take total easing in the cycle to 75bp, following quarter-point moves in February and May. The cut is expected to be carried by consensus, in contrast to July’s split decision which shocked markets with its decision to hold. (See MNI RBA WATCH: Board Shocks With Hold As Trade Fears Ease) The cash rate was last at 3.6% in March 2023.

Markets have again fully priced in a cut next week and a 3.35% rate by year-end, with scope for another reduction in Q1. However, recent RBA communications point to a more patient, data-driven approach. The accompanying Statement on Monetary Policy should offer greater insight into how loose the Bank considers current settings.

DOMESTIC DATA

The RBA’s two mandated targets – inflation and employment – have both eased since the Board last met.

Australia’s trimmed mean inflation, the Bank’s preferred measure, slowed to 2.7% y/y in Q2 from 2.9% in Q1, with a quarterly rise of 0.6%, ABS data showed. (See chart) Headline CPI also eased 20bp to 2.1% y/y. Annual goods inflation slipped to 1.1% from 1.3%, while annual services inflation slowed to 3.3% from 3.7%.

The RBA had forecast Q2 core inflation at 2.6% in May, assuming a 4.0% cash rate. June’s monthly CPI indicator showed trimmed mean inflation at 2.1% y/y, though the Bank places limited weight on the series.

Unemployment rose 20bp to 4.3% in June – 10bp above the May forecast – while the economy added 2,000 jobs, up from May's fall of 2,500.

Other indicators, such as retail sales (+0.5% m/m in June) and lower July job advertisements, are unlikely to materially affect the Board’s deliberations.

FURTHER EASING

Attention will shift to Governor Michele Bullock’s remarks and the SOMP to gauge the Reserve’s appetite for more cuts. Former staffers argue labour market and wage growth trends will be key, alongside the slowing global economy, as a 3.6% cash rate may be only marginally above the RBA’s neutral estimate. (See MNI: RBA To Cut In August, Jobs Market To Guide Further Easing) Bullock reiterated wage-price concerns last month, leading some to expect a more cautious path than markets currently price. The Bank is also likely to look beyond the unemployment rate, assessing broader labour market measures, and may still view conditions as relatively tight.

Former Board Member Warwick McKibbin recently cautioned against moving too quickly, warning that nominal government spending is driving nominal GDP growth and could force a policy reversal within six months absent a major global shock. He placed the neutral rate above 4%, well above market assumptions of around 3%.