RBA June Meeting delivers unanimous hold

Sally Auld | Chief Economist

Key points

• In a unanimous decision, the RBA’s Monetary Policy Board left the cash rate unchanged at 4.35%.
• After 75bp of hikes, the Board acknowledges that “…financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected.”
• We expect the RBA to remain on hold for the remainder of this year, but acknowledge that the inflation challenge will remain the main concern for policy makers in the next few quarters.

Assessment

The RBA Monetary Policy Board delivered another short Statement today, noting that “…headline and underlying inflation are still too high” and that it remains “…focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through.” This emphasises that inflation remains the predominant focus of the Board at present, especially given the Board’s view that “…there are signs the economy is slowing as expected.” With inflation taking precedence over growth for the time being, it is too soon to expect any dovish shift in the Bank’s broader narrative about monetary policy. Accordingly, we think it appropriate that the market retains some chance of tightening in the next few months.

Detail

In a relatively concise Statement, the RBA Monetary Policy Board was once again explicit about concerns around the inflation outlook, noting that both headline and core measures of inflation are too high and that the focus – at least for now – is to ensure that second round inflationary impacts do not become embedded into wage and price setting behaviour. One positive development was the acknowledgement that some measures of inflation expectations have eased of late.

On the growth front, the broad story was that the economy is slowing as expected, largely driven by an as expected softening in household consumption. However, the Statement did note that “…momentum in the housing market has shifted”, even if the economic impact of this shift wasn’t made explicit. We suspect that the Bank may have more to say on this dynamic in August, as the next set of growth and inflation forecasts are finalised.

The unexpected jump in the unemployment rate in April was noted, although caveated by the fact that other measures of labour market conditions remain resilient. We expect the unemployment rate to fall back in May (data released on 25 June). If it instead holds at 4.5%, we would see this as a significant dovish development for the policy outlook.

We are somewhat surprised at the lack of reference to the decline in the capacity utilisation measure of late, given that 1) the Bank has anchored to notions of excess (or otherwise) capacity to guide its sense of the output gap in the past year; and 2) the series has registered one of its largest six month declines in the last 15 years (ex pandemic), suggesting the possibility that the economy may be slowing by more than anticipated. Perhaps like housing, this too will deserve a more thorough acknowledgement in August.

The Statement avoided any characterisation of the overall policy stance, preferring instead to observe that “…financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected”. This buys the RBA some time to data watch and will be enough to keep the hawks at bay in the near term. We continue to expect the RBA to leave the cash rate on hold for the next few quarters, and believe the next move in rates to be down in H1 2027.

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