RBA Preview: Hawkish Hold Anticipated Amid Persistent Inflation and Robust Employment

The Reserve Bank of Australia (RBA) is anticipated to maintain its current interest rates in September, despite persistent inflation and a robust labor market potentially driving a more hawkish stance from the central bank.

According to a recent Reuters poll, the RBA is expected to keep its cash target rate steady at 4.35%. However, the bank may indicate that interest rates will remain elevated for an extended period or could increase further, especially given that inflation has remained high through the second quarter.

While consumer price index inflation has decreased gradually in recent months, the pace has been slightly slower than the RBA had predicted. Core inflation continues to exceed the RBA’s target range of 2% to 3% annually.

Members of the RBA’s rate-setting board have been contemplating rate hikes for the past two meetings, with concerns growing about potential inflationary pressures. Governor Michele Bullock has frequently cautioned that persistent inflation might lead the central bank to implement additional rate hikes.

Despite a decline in the prices of goods, inflation in service prices has remained stubborn, particularly in light of a strong labor market. This issue has been a significant focus for the RBA.

Australia’s labor market has shown resilience despite a slowdown in economic activity, with monthly job growth consistently surpassing expectations over the last five months. Although the RBA is not anticipated to hike rates at this meeting, it is expected to maintain higher rates for an extended duration and postpone any plans to reduce rates.

Analysts at ANZ predict that the RBA could initiate an easing cycle by February 2025, but they note that the timing may be pushed back due to the current strength of the labor market. They expect that while a hike might be considered in the September meeting, a decision to hold rates steady will likely prevail.

The RBA’s hawkish projections stand in contrast to those of other major global central banks, many of which are beginning to lower interest rates in response to weakening inflation and economic conditions. For example, the Federal Reserve recently cut rates by 50 basis points and indicated the start of a cycle aimed at reducing rates significantly.

Market Reactions:

Australian stocks have seen substantial gains from the dovish outlook of the Federal Reserve, with lower interest rates prompting a shift in investor focus towards economically sensitive sectors, leading the ASX 200 to reach record highs last week. However, local stocks could be susceptible to profit-taking, particularly if the RBA’s signals lean too hawkish, potentially causing a short-term market pullback.

The Australian economy has been cooling rapidly over the past year due to the pressure from high rates, and the expectation of sustained high rates could create an unfavorable environment for local stocks.

As for the Australian dollar, it has gained from the RBA’s hawkish stance coupled with a dovish Fed, with the AUDUSD pair recently reaching a near nine-month peak. Any additional hawkish indications from the RBA could further bolster the currency.