Preview: RBA June outlook - The path of least regret

The Reserve Bank Board of Australia is scheduled to meet on Tuesday, the 6th of June, at 2.30 pm in what is expected to be another line ball decision.

Last month, the RBA sent ripples through the market, lifting the cash rate by 25bp to 3.85%. Marking the RBA’s eleventh rate increase in a cycle starting last May, it amounted to a cumulative 375bp hike.

With inflation having likely peaked, the RBA concluded it remained too high, warranting an additional hike to realign inflation with the target.

Governor Lowe's standpoint

In a recent statement, Philip Lowe, Governor of the Reserve Bank of Australia, underscored the significance of ushering inflation back on target in a sensible timeframe, hence justifying the Board's decision to implement another uptick in interest rates.

"The importance of returning inflation to target within a reasonable timeframe underscored the board's judgement that a further increase in interest rates was warranted."

Maintaining its tightening stance, the RBA indicated its willingness to instigate additional rate hikes, contingent on the economy and inflation's trajectory. Lowe emphasised the Board's vigilance over global economic developments, trends in household spending, and inflation and labour market forecasts.

"Continued attention will be paid to developments in the global economy, trends in household spending and the outlook for inflation and the labour market."

RBA cash rate chart

Market forecasts and the RBA's decisions

In the wake of the RBA’s May Board meeting, wages, employment, and retail sales data have come out softer than expected. Bucking the trend of milder data, the Monthly CPI indicator exceeded expectations at 6.8% (vs 6.4% exp). The core measure of inflation, the trimmed mean, lifted from 6.5% to 6.7%.

As the monthly CPI indicator is relatively new and this month excluded around 35% of the items in the basket (35% of the basket is surveyed in the second or third month of the quarter), its credibility is less than quarterly inflation numbers.

Nonetheless, the re-acceleration in the Monthly CPI indicator will not sit well with an RBA looking for firm signs that inflation is cooling after its record-breaking run of rate hikes.

Also, likely to be figuring in the RBA’s considerations, the Fair Work Commission handed down its Annual Wage Review for 2022-2023 this morning. The decision to increase award and minimum wages by 5.7% exceeded market expectations of 5%, came below the 7% the ACTU claimed, and surpassed the 3.5% employers sought.

The RBA's predicament and likely decision

The RBA has highlighted its focus on wage growth and subdued productivity in recent communiques. “Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

Cognizant of the RBA’s predicament of cooling inflation while keeping the economy on an “even keel”, the Australian interest rate market is pricing a ~25% chance of an RBA rate hike next week.

However, due to the hotter than expected Monthly CPI indicator and the higher-than-expected rise in the award and minimum wages at the Annual Wage Review, we think the RBA will elect to raise rates by 25bp to 4.10% when it meets on Tuesday.

Summary

The Board of the Reserve Bank of Australia has a meeting on the calendar for Tuesday, June 6th, at 2:30 pm. In a decision that's likely to be finely balanced, we anticipate the RBA will opt for a 25bp hike, pushing rates to 4.10%.