RBA could sit it out in July to await greater clarity on CPI outlook

There’s every chance that the RBA will remain sidelined at its policy meeting next week, and choose to wait for second-quarter inflation data and new economic forecasts.

There’s every chance that the Reserve Bank of Australia will remain sidelined at its policy meeting next week, and choose to wait for second-quarter inflation data at the end of this month and a new economic forecasts in August, rather than cut the official cash rate a third time this year.

Money markets have fully priced in a further reduction in the OCR, with traders seeing recent inflation data as a clear signal that the RBA has scope to cut again, and pointing to more reductions later in the year.

But that faith in markets might well be misplaced. There’s a few factors that aren’t getting much airtime that could swing the RBA’s monetary policy board toward an on-hold decision.

The biggest of them is the return to a sense of some calm in global markets. Back in May, when the RBA openly discussed slashing the OCR by 50 basis points, the trade war between the US and China was in full swing and rising dysfunction in the US bond market had sharply increased the risk of a deep recession in the US.

The heads of major Wall Street banks such the chief executive of JPMorgan Chase, Jamie Dimon, were putting the likelihood of a US. recession as high as 60 per cent.

The RBA was right then to kick around the idea of an emergency cut, but things have since cooled. Markets have gathered their composure and equity prices are again in an updraft.

It means the RBA has room again to calmly consider the domestic economic environment on its own merits.

RBA governor Michele Bullock is a naturally cautious central banker, and in the absence of an environment where US bonds yields are surging higher and equity markets are being rattled, it could be that she will want to see to another batch of local quarterly inflation numbers and updated in-house forecasts on the economy before moving forward.

That scenario implies the RBA will hold rates steady this month. The RBA’s decision-making process is back to being almost exclusively data dependent. So waiting for another inflation update on July 30 doesn’t really pose much of a risk.

RBA governor Michele Bullock during a recent press conference. Picture: Nikki Short/NewsWire

Even with the latest monthly inflation data showing consumer prices were up by just 2.1 per cent in the year to May, there were still some worrying hotspots in the data. There also remains the risk that inflation might spike up again, once government subsidies to offset rising electricity prices are removed.

Then there’s the idea that the RBA didn’t tighten monetary policy overly hard when inflation jumped in the post-pandemic era, so the central bank isn’t in the position now that it has to reduce rates at the speed that many of its peers have.

The RBA likely thinks that policy settings aren’t overly tight, with the OCR currently at 3.85 per cent. The evidence for that is in the job market, where employment growth is solid, and unemployment remains at historic lows close to 4.0 per cent.

policymakers at the central bank likely estimate that a neutral OCR is around 3.0 per cent, but even that’s a moving estimate. It could be higher.

At the end of the day, after two OCR cuts since February, the central bank doesn’t feel that it is standing on the neck of the economy any more.

Predicting what the RBA will do next week is further complicated by the arrival to the monetary policy board of newly-appointed Treasury Secretary Jenny Wilkinson.

Wilkinson is just one of nine board members, but her views on the economy will need to be spelled out to the remaining eight members, and they may differ a lot from her predecessor Steven Kennedy.

With the weight of the Department of Treasury behind her, Wilkinson’s views will hold a lot of sway when the board makes its decision.

It’s true that private demand is weak across the economy, and a cut in interest rates would be helpful. But the supply side of the economy is also ailing, which has the RBA worried about the balance of the two if interest rates are cut too far.

So while money markets are fully priced for an easing in the OCR next week, the outcome of the board meeting is far from clear.

The RBA board wouldn’t lose anything if it decided to wait a few weeks for an update on the inflation outlook.

The Wall Street Journal