RBA Preview: Holding for now
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Bottom Line: The RBA meeting on 1st August will see no change in policy in our forecast. Our central forecast consist of a last 15bps tightening from the RBA in 2023 but will only be hiked when we see another spike in CPI. The latest Q2 CPI has shown moderation both in the headline and the RBA trimmed mean, which does not support a tightening bias in this August RBA meeting. We expect no change to forward guidance as RBA would like to leave the doors open for tightening in case inflation flares up again.
The market consensus are currently divided between on hold or a 25bps hike from the RBA in the August meeting as supporting factors exist for both decision. However, in our forecast, we are forecasting an "on hold" meeting on Tuesday with 15bps remaining in the pipeline for RBA before year end 2023 if inflation spikes. The RBA meeting on 1st August will likely bring little fundamental change to current forecast as we expect no change to forward guidance. RBA would like to leave the doors open for tightening in case inflation flares up again.
The decision would in line with RBA's rhetoric in the past quarter when they switch to become more data dependent and is patient to assess the lagging effect of cumulative hikes without turning a blind eye to inflation dynamics. The room for RBA to tighten while balancing economic growth is minimal, thus our forecast of 15bps hike till terminal rate. The latest Q2 CPI has shown moderation both in the headline (0.8% q/q, 6% y/y from 1.4% q/q , 7% y/y ) and the RBA trimmed mean(1%q/q, 5.9% y/y from 1.3% q/q, 6.6% y/y), which does not support a tightening bias in this August RBA meeting. As long as monthly CPI do not show a spike, we believe RBA would remain on hold to save their firepower.
The household balance sheet has been restricted by mortgage cost and inflationary living pressure, while business are facing the tightest financial conditions in months. Therefore, the RBA has to be very careful with their tightening steps. Elsewhere, economics growth is expected to slow, along with peaking labor market. It is likely RBA will continue to be CPI sensitive in the coming months to choose either on hold or dish out the remaining 15bps hike.