MNI: RBA Likely To Hike Again In August - Ex Staff

The Reserve Bank of Australia is likely to wait until its August meeting to raise its cash rate by a further 25 basis points from its current 4.35%, before pausing for a longer period to assess the restrictive stance and monitor the economy as global volatility weighs on growth, former Bank officials told MNI.

Tim Robinson, an ex-RBA economist and now senior research fellow at the Melbourne Institute, said a further rate hike was probable, noting recent wage price index data made an August move more likely than June. “The extent to which the WPI accounts for productivity growth is not obvious. This makes judging what growth rate is consistent with the RBA’s inflation target difficult,” he said, adding that the moderation in public-sector wage growth was encouraging.

“Unfortunately, it is quite possible that 3.3% y/y [wage growth] is still too high to be consistent with the midpoint, absent an improvement in productivity growth.”

An August move would give the RBA more time to assess the cumulative impact of tightening already delivered, while coinciding with the release of the quarterly Statement on Monetary Policy and updated forecasts, Robinson said.

Markets are pricing around a 19% chance of a hike at the June 16 meeting and a roughly 65% probability of a move at the Aug 11 meeting, with the cash rate seen reaching 4.7% by December.

Martin Eftimoski, who worked at the RBA from 2017 to 2021, agreed that the Bank was likely to hike again in August, though he questioned whether another increase would ultimately prove necessary given mounting domestic and global risks. Governor Michele Bullock struck an overly hawkish tone following the May 5 decision, he said, warning the Bank risked fighting “yesterday’s inflation battle” without a clear view of future conditions. (See MNI RBA WATCH: 8-1 To Hike; Inflation-Growth Equation Worsens)

WORSENING OIL SHOCK

While the August increase is likely, weakening economic conditions would prevent further tightening, Eftimoski said, noting the RBA’s latest forecasts and assumptions appear somewhat optimistic regarding both economic growth and the future path of oil prices.

The central issue for policymakers is whether the oil shock proves temporary or evolves into a more persistent supply disruption tied to instability around the Strait of Hormuz, he added. “If the conflict had been resolved earlier and shipping resumed normally, you could have seen a temporary shock and a gradual glide path lower in prices,” he said. “But we’re well past that point now. I don’t think the seriousness of the situation is being appreciated.”

He pointed to signs of global demand destruction for energy, and said that economies are already adjusting to constrained supply even before a further rise in prices. “We are seeing as much demand destruction as we possibly can without seeing prices go up,” Eftimoski said. 

“People are taking the lack of oil very seriously, and it’s corresponding to decisions that are going to shrink GDP without necessarily increasing prices. If I was the RBA, I’m not sure I would know what to do. If aggregate supply has been permanently scarred, then you need much higher rates to accelerate the inevitable decline in demand. But if it’s temporary, then you need to keep your cool and focus on ensuring inflation expectations remain anchored.”

FEDERAL BUDGET

While Robinson doubted whether the government's recently-released federal budget would impact the near-term inflation and interest rates outlook, Eftimoski argued its effects would be mixed. 

Cuts to National Disability Insurance Scheme spending and higher effective taxation through capital gains and negative-gearing changes would weigh on household cash flow and consumption, creating a contractionary impulse, he continued. While the budget remained stimulatory overall due to the deficit, it was less expansionary than it could have been, he said.