RBA tipped to leave rates on hold tomorrow
Further downside surprises on inflation, weaker-than-expected wage growth and flat retail sales are expected to see the Reserve Bank keep interest rates on hold, according to economists.
The Reserve Bank of Australia (RBA) is expected to keep rates on hold at 4.1 per cent at its September meeting tomorrow with the ASX’s RBA Rate Indicator suggesting an 86 per cent probability of the cash rate remaining the same.
Commonwealth Bank economist Stephen Wu said the latest inflation data, together with the data on wages and unemployment, have generally undershot market expectations and are broadly in line with or weaker than the RBA’s own expectations.
“As such, there is no ‘smoking gun’ for the RBA to raise rates again at the September Board meeting, especially after having kept rates unchanged over the past two meetings. A deteriorating outlook for the Chinese economy will also likely mean the RBA are content to maintain their wait-and-see approach on rates,” said Mr Wu.
The bank expects that RBA will remain on hold at 4.1 per cent till an easing cycle commences in March 2024.
“In recent communication the RBA sounds more comfortable inflation is heading in the right direction. The rate hikes in May and June have now been characterised as insurance hikes against upside risks to inflation. And now evidence is building that rate hikes are working through a lower than expected Q2 23 CPI,” said Commonwealth Bank senior economist Belinda Allen.
AMP chief economist Shane Oliver also expects the RBA will again leave rates on hold at 4.1 per cent tomorrow.
“The further downside surprise on inflation coming on the back of weaker than expected wages growth, softer jobs data, a continuing flat trend in retail sales along with weaker business conditions globally are consistent with the RBA remaining in wait and see mode,” said Dr Oliver.
However, further tightening of monetary policy may still be a possibility in later months given the RBA’s concerns about services inflation being sticky and upside risks for wage growth, he said.
“This was effectively reiterated by soon-to-be Governor Michelle Bullock in the past week,” he stated.
“However, in the absence of stronger than expected wages growth, a further drop in unemployment or a reversal of the downtrend in inflation the RBA is expected to leave interest rates on hold for the rest of this year ahead of rate cuts next year.”
Westpac chief economist Bill Evans said evidence around an ongoing weak economy and slow inflation will encourage the board to extend its pause in interest rates through to the end of the year and into 2024.
“That does not mean that the Board will abandon the policy of considering ‘on hold’ or ‘25bp hike’ as the two options but, as we saw in August, the ’on hold’ case will progressively become dominant. The Board will also be mindful of the weak AUD – largely a function of the unusual negative yield differential with the US and some market concerns that the policy target of 2.8 per cent inflation by 2025 is too soft,” said Mr Evans.
Westpac expects the first interest rate cut to be further away in the September quarter of 2024.
“Our estimate is that by the time of the August meeting next year, the Board will be confronted with an unemployment rate of 4.5 per cent; inflation having fallen to 3.4 per cent for the year; and GDP growth of 0.8 per cent for the year to the June quarter 2024. By the time of the August 5–6 meeting, the board will have a good idea of growth to the June quarter,” said Mr Evans.
“However, it would need to wait until the 2023–24 September board meeting before the official growth rate for the June quarter will have printed.”
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