Why economists expect the Reserve Bank to hold the cash rate this week
After months of pain, a surprise fall in inflation has buoyed hopes the cash rate will hold.
Economists anticipate the Reserve Bank remaining aloof from rate hikes this week. The central bank's Governor Michele Bullock and board are set to convene on Monday and Tuesday. Forecasts indicate the cash rate will maintain its current level of 4.35 per cent. This prediction stems from a surprising drop in inflation, which is still above the bank's target range of 2 to 3 per cent.
June figures showed headline inflation plummeting to 3.8 per cent, the lowest point since the start of the Iran war. The RBA's preferred measure, trimmed mean inflation, remained constant at 3.6 per cent. Taylor Nugent, a senior economist at NAB, believes the RBA will likely align with market expectations. He stated that the bank requires a significant push to initiate further tightening.
Nugent pointed out that unemployment is slightly higher than forecasted and underlying inflation is marginally lower than initially thought. The RBA may monitor the effects of increased fuel prices on inflation after the removal of the federal government's fuel excise discount and the surge in oil prices due to Middle Eastern unrest.
HSBC chief economist Paul Bloxham anticipates the central bank will adopt a cautious wait-and-see stance before deciding to adjust the cash rate. Nonetheless, inflation remaining above target keeps economists concerned about its high levels. Bloxham believes the global downturn will be sufficient for the RBA to contemplate lowering its cash rate in the second half of 2027.
With trimmed mean inflation persistently above the mid-point of the RBA's target band for over four years, the board's patience for inflation surpassing the target or a slower-than-anticipated return of inflation to target is likely to dwindle. Bullock faces a parliamentary inquiry on Friday, during which her bank's board will be scrutinized.
On Tuesday, fresh data on business confidence will be released with the unveiling of NAB's latest monthly survey. Meanwhile, Wall Street is on the rise, with the US economy unexpectedly shedding jobs and dampened expectations of the Federal Reserve raising interest rates.
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