RBA to Hold Firm

The RBA is likely to maintain current monetary policy settings at today’s meeting.

Australian Inflation moderated to a still far too extreme 7.0% in Q1, and 6.3% monthly in March, but the further sharp drop in headline inflation ensures the RBA will remain on hold at today’s meeting.

However monthly CPI excluding volatile items actually reaccelerated slightly to 6.9% in April. Additionally, Producer Prices also re-accelerated in Q1, from 0.7%, to 1.0%. This will maintain a hawkish bias at Martin Place, even as they stay on hold for a second meeting.

The higher Producer Prices outcome is likely to deliver a pipeline effect flowing into CPI outcomes through Q2. Subsequently, while the RBA will remain on hold for the moment, and is possibly finished for this year, markets and property investors should remain alert to the possibility that rates could still go higher yet again at any moment. Should this uptick in Producer Prices begin to manifest through to consumer prices outcomes, and while services sector inflation also remains troublesome, then the RBA’s rate hiking cycle may not yet be over. With or without a new expert panel determining policy.

In summary, the RBA is very likely to keep rates on hold today, but to comment that there remain continuing upside risks to the inflationary outlook which could require further adjustments at some point.

Overall the outcome could be mildly bullish equities and bearish for the currency, though these expectations are largely already built into the current pricing of these markets.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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