Macro Intelligence: RBA leaves rates unchanged

The RBA has paused rates again. In this week’s IG Macro Intelligence, we discuss the decision to hold rates in July, review the latest Australian inflation figures, speculate about whether the RBA could hike rates further from here, and analyse the possible impacts on the Australian dollar and ASX 200.

A hold or pause? RBA keeps rates unchanged

The RBA opted to keep its cash rate target unchanged at its July meeting at 4.1%. It’s the second so-called “pause” from the central bank, with policymakers justifying it because it provides more time to assess incoming data.

RBA cash rate target chart

In the meeting’s accompanying statement, the RBA explained that having “increased (interest rates) by 4 percentage points since May last year,” a pause in hikes “will provide some time to assess the impact” of those rate rises.

The central bank also pointed to the May CPI indicator as evidence of potentially lower inflation, stating inflation has “passed its peak, and the monthly CPI indicator for May showed a further decline.”

However, the RBA warned that further rate hikes “may be required to ensure that inflation returns to target.”

Sticky or slipping?

The RBA’s decision to hold rates steady and to do so because monthly CPI is falling cuts to the debate about whether price pressures are decreasing in Australia.

The May CPI indicator revealed a mixed picture of inflation in Australia. The headline CPI figure, which the RBA alluded to in its policy statement, has fallen considerably faster than expected. It rose by 5.6% in May, down from 6.8% in the month prior and below the 6.1% estimated by economists.

Monthly CPI indicator chart

However, when stripped of volatile items, the CPI indicator was, in fact, 6.4%. Although that was down from 6.5% in April and off its peak above 7%, the trend lower is proving slower, begging the question of whether underlying inflation pressures are subsiding.

The RBA’s next move will likely hinge on this month’s quarterly CPI read.

Where to from here for inflation?

While the CPI indicator has been used to justify recent RBA decisions, the quarterly CPI data will hold far greater weight for future policy.

The monthly CPI indicator is just that - an indicator - with the official quarterly release the definitive word on inflation in Australia.

The quarterly CPI Index data is released on the 26th of July, and although private sector economists have yet to publish updated forecasts, most believe it will show a lower rate of price growth in the June quarter.

Based on the most recent Statement on Monetary Policy, the RBA expects inflation to moderate to 6% year-over-year for the quarter. A reading at this level or lower would justify a longer pause and potential end-of-rate hikes. Meanwhile, a reading above 6% would imply the central bank's hikes aren't having the desired effect and would invite further interest rate increases.

Inflation forecast chart

Will the RBA hike interest rates again?

The markets are still pricing in another hike or possibly two from the RBA before the end of the rate hiking cycle.

After July's pause, cash rate futures imply the central bank's terminal rate - or the peak rate for this cycle - is 4.5%. That would suggest a certainty of one more hike and a better-than-even chance of another before the end of the year.

Currently, the markets are fully pricing a rate hike from the RBA by October, with futures fully discounting a hike at that meeting. The balance of probabilities points to the final increase arriving in January.

ASX 30-day futures chart

How will the RBA impact the markets?

The prospect of a lower peak in interest rates has simultaneously weakened the Australian dollar and supported the ASX 200.

The AUD/USD remains rangebound, with sellers emerging above 68 cents and dips being bought below 66 cents. The pair is carving out a megaphone pattern indicating greater market volatility and indecision.

AUD/USD daily chart

The ASX 200 is rangebound and lacks a directional bias. Momentum indicators are moving sideways, while major resistance is just below 7400, and support is around 7050. 7200 is the middle of the range and a proven pivot point for the index.

ASX 200 cash daily chart