MNI RBA WATCH: On Hold, Eyeing Further Labour, CPI Data

The Reserve Bank of Australia board is likely to hold the cash rate at 3.6% next week as it considers the floor of its easing cycle and awaits clearer signals on inflation and labour market tightness, making a November cut a possibility.

Both inflation and labour market data have been mixed since the board met in August, when it lowered the cash rate 25 basis points, bringing cumulative easing since February to 75bp. (See MNI RBA WATCH: Bullock Points Toward Further Cuts)

Slightly stronger-than-expected monthly inflation in August saw markets trim easing expectations, with zero chance of an October move priced in and only a 44% probability of a November cut. Markets had previously expected 22bp of easing by year’s end, now pared back to 16bp.

LOCAL DATA
August’s monthly CPI indicator rose 0.3 percentage points y/y, up from 2.8% in July, while the trimmed mean slowed to 2.6% from 2.8%, the Australian Bureau of Statistics said Wednesday. While the headline figure was 10bp above forecasts, the details were mixed with strong declines in electricity prices offset by rises in other areas, such as housing and clothing. 

Governor Michele Bullock has repeatedly stressed the Bank’s distrust of the monthly measure and its preference for quarterly data. The RBA had already forecast headline inflation to edge up to 3% by Q4, with the trimmed mean easing to 2.6%, so the August result is unlikely to shift its strategy. Markets have overestimated the impact of monthly inflation data before, with traders pricing in a cut at the July meeting due to weaker than expected May data, only to be disappointed. (See MNI RBA WATCH: Board Shocks With Hold As Trade Fears Ease)

Labour market conditions may carry more weight. August employment fell by 5,000 -- as unemployment held steady at 4.2% -- and while the RBA’s models put NAIRU at 4.5%, the Bank believes the true level may be closer to 4.3-4.4%.

ONE MORE?

Former RBA officials argue that a tight labour market, weak productivity, and strong wage growth could limit the Bank to just one or two more cuts, with the risk tilted toward one. They agree labour market performance will be central to the Bank’s next steps.

Trimmed-mean inflation is likely to remain near the top of the Bank’s 2-3% target if wages outpace its assumptions despite its recent productivity downgrade, according to the RBA’s former Head of Research John Simon, noting this would limit the degree of further easing. The ABS will release Q3 CPI results on Oct. 29, ahead of the RBA's Nov 3-4 meeting.