The RBA hands down its decision this afternoon. I think the Board will probably hold, but with inflation still way too high and the labour market holding up, they should increase again to 4.60%.
The case for hiking remains strong:
⚖️ The cash rate sits at 4.35%, only slightly restrictive.
⚖️ Headline CPI was 4.2% YoY in April and trimmed mean was 3.4% YoY, both well outside the 2 to 3% target band.
⚖️ The FWC just handed down a 4.75% increase to minimum and award wages from 1 July, which will flow through to prices.
⚖️ The fuel excise cut expires on 30 June, putting roughly 26c per litre straight back onto pump prices the same week.
⚖️ The labour market remains tight, with unemployment still historically low at 4.5%.
⚖️ ANZ-Roy Morgan two-year inflation expectations remain elevated at 6.6%.
Inflation is miles above target, with underlying inflation is going in the wrong direction. We also have two big cost pressures impacting the economy in Q3, with the return of fuel excise and a significant bump in the minimum wage. Both push directly on prices. The labour market, meanwhile, is still tight enough to absorb a rate rise without breaking.
The only genuine change on the other side of the ledger is some progress on a deal between Iran and the US. A memorandum of understanding has apparently been signed however, the actual terms remain unknown. If the deal holds, that materially reduces the long tail risk to energy prices. What it doesn't help with is the shorter-term concerns through Q3 and Q4. Any return to normal oil flows is going to be slow, and reserves are already under pressure, meaning energy prices are likely to go up before they come back down.
All together, this makes a hike is the lowest risk option. There's a clear case for increasing rates with inflation that's still well outside the target band and continuing cost pressures while the downside risk to prices is speculative.
As I said up top, I expect the Board will find enough in the softer growth data and the prospect of a deal to justify sitting on its hands. But an excuse to pause is not the same as a good reason to.