The RBA will be back with another rate decision tomorrow, and this is a difficult one because while it’s obvious they need to increase rates again, it's not going to be an easy decision for them.
The case for hiking is strong on multiple fronts:
⛴️ Inflation is the highest since September 2023 and heading higher as the full impact of the Hormuz fuel shock slams into the economy.
⛴️ Even trimmed mean inflation (at 3.3%) Is well outside the RBAs 2 to 3% target band and is likely understating the breadth of the problem as the shock widens across housing, transport, and food simultaneously.
⛴️ Inflation expectations are becoming unanchored, with ANZ-Roy Morgan two-year expectations at 6.6%, the highest since the series began in 2010
⛴️ The labour market remains tight with effectively full employment and strong full time employment growth.
⛴️ A rate rise will support the Aussie dollar, which helps keep a lid on imported inflation which is where the inflation impulse is primarily coming from at the moment.
As I noted above, it's pretty obvious that the RBA needs to increase rates. Inflation is too high and rapidly heading in the wrong direction. The labour market remains strong, so there's no reason there to pause, and pausing risks inflation expectations becoming further unanchored. The lessons of the past are clear, once inflation expectations become unanchored it requires a more damaging and aggressive policy response later to re-anchor them, something the RBA should want to avoid.
However, the March decision to hike was a close call, and this decision is an even tricker one, with the economy and households already teetering. I wouldn't be at all surprised to see the RBA blink and make another mistake by pausing the hiking cycle prematurely.
While we are dealing with a supply side crisis, even in a best-case scenario, we'll be dealing with continued cost pressures for at least the next two quarters. I just don’t see a reasonable way through this without several more rate increases. Too much forward inflation is already baked into the system.