Fin-X Rapid Response August 12th

The RBA's Monetary Policy Board left the cash rate target unchanged at 4.35% in a unanimous decision at today's meeting, as widely anticipated. However, an increase was discussed. Inflation is expected to return only gradually to the target range, and the RBA still sees inflation risks skewed to the upside, despite tighter financial conditions. The communication tone was deliberately hawkish.

• The Board kept the cash rate on hold at 4.35% today. The governor confirmed at the press conference that a cut was not discussed, but a hike was.

  
  

• Headline inflation eased to 3.8% year-ended in the June quarter, materially weaker than the RBA's own earlier forecast, while trimmed mean (underlying) inflation stayed elevated at 3.6%, little changed from the March quarter.

  
  

• The governor's statement said: "While the impact of the Middle East conflict on inflation has so far been less than expected, headline inflation is still too high. Trimmed mean inflation also remains elevated and is little changed from the March quarter. Oil and most related commodity prices remain higher than they were prior to the Middle East conflict. Some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so. Short-term measures of inflation expectations have eased but remain higher than earlier in the year."

  
  

• The governor summarised the factors influencing today's decision: "The disruption to global oil supply is adding directly to inflation and there are indications that higher fuel prices are being passed through to prices of other goods and services, so inflation is likely to remain high for some time. This inflation impulse is in addition to the effect of capacity pressures in the economy.

  
  

  The Board remains focused on ensuring that high inflation does not become embedded. To achieve this, growth in aggregate demand needs to remain subdued to reduce capacity pressures and bring inflation back to target. Following three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and the economy appears to be slowing as expected. But inflation is still too high. It is not expected to return to around the midpoint of the target range until late 2027 and there are upside risks to this projection. With monetary policy judged to be somewhat restrictive, the Board decided to leave the cash rate target unchanged while it assesses how the economy is evolving. The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise."

• The quarterly Statement on Monetary Policy (SMP) said that inflation is now projected to return to the 2% - 3% target range midpoint only by early 2028. Risks to the inflation outlook are judged to be skewed to the upside.

  
  

• GDP growth is expected to remain subdued through 2026, weighed down by softer real household income growth, a weaker housing market and the earlier cash-rate increases, partly offset by strong data-centre-driven business investment.

  
  

• The estimates of future productivity were revised sharply downward for 2026 and 2027, contracting by-0.5% this year.

  
  

• S&P/ASX200 9,250 +0.2%, AUDUSD 0.7055 (unch), Aus 2yr 4.56% (unch), Aus 10yr 5.01% +2bps

  
  

Fin-X View

• The governor is still signalling a pause rather than a reversal in the rate outlook, with the SMP using direct language, saying that "the economy must slow" for inflation to return to target.

• The Board is keeping rates on hold while they allow some time for previous rate rises to work their way through the system.

• While today's message is clearly very hawkish, economists are divided on whether the cash rate will need to be raised again. Another rate rise is only 60% priced in by the end of February when the probability peaks.

• We would be surprised to see another rate rise but acknowledge that the end of fuel subsidies and, in some scenarios, potentially higher food prices related to this year's El Niño could offset at least some of the effects of lower house prices.

• We would assign a less-than-even probability of another rate rise based on the data, but slightly higher, broadly consistent with market pricing, based on the hawkish reaction function outlined today.

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