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Steve Campbell: Inflation cools, but RBA caution remains
June CPI data has eased expectations of another rate hike in August, although inflation remains above target and the RBA’s tightening bias is likely to stay in place. Pendal’s head of cash strategies STEVE CAMPBELL explains
- Softer inflation lowers August hike expectations
- RBA likely to retain tightening bias
- Find out about Pendal’s cash funds
THE June CPI release has led to an easing in expectations of a further rate hike by the Reserve Bank of Australia (RBA) in August.
The data showed second quarter trimmed mean inflation rising by 0.8% taking the annual trimmed mean to 3.6%.
Consensus was for 0.9% and 3.7%. The result was also lower than the RBA’s May forecast of 3.8%.
Monthly headline inflation data was also released and fell 0.1% resulting in annual headline inflation of 3.8%. Consensus was for +0.2% and 4%.
The following graph shows the contribution by sector to annual inflation against the RBA’s 2 to 3% target band: –
Where does this leave the RBA ahead of its August meeting?
The market had ascribed around a 20% chance of a hike leading into today’s numbers and the cash rate peaking at 4.60% in early 2027.
Post the data, the market is saying zero chance of a hike next month and 50/50 on whether the RBA has finished tightening.
Prior to today’s release Governor Michele Bullock spoke at the Anika Foundation on the 28th July. Among the key points in her speech was that the housing market has been weaker than expected since the last set of forecasts in May.
The labour market has also been a bit softer than expected. Today’s monthly inflation data may have reflected some of the softening in housing extending into second round effects. Furniture prices for example fell over 5% in June and major household appliances dropped 2.5%.
Governor Bullock did also point out that the RBA retains a tightening bias and that “if it looked like inflation was not coming down, the board would have a difficult decision to make with respect to raising rates”.
With inflation below the RBA’s forecast, it is not facing a difficult decision in August. No change and see how the inflation data evolves.
Inflation does however remain above the RBA’s 2 to 3% target band. Governor Bullock pointed out that demand was still exceeding supply.
Should demand pick up, the RBA would expect inflationary pressure to resurface. To keep inflation under control requires an improvement in productivity, something that has been missing for a while.
A period of weaker growth that brings the economy back into balance is still required before the RBA will be comfortable that inflation is heading the right way.
Until that occurs, and with inflation still running 0.6% above their target band, it is likely that the tightening bias remains in the near term. A softening in the RBA’s language may occur when inflation starts moving back towards 3%.
Find out about
Pendal Managed Cash Fund
Steve Campbell, Head of Cash Strategies
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal Managed Cash Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332 AFSL 431426.
It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice.
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To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. All investing involves risk including the possible loss of principal.