Bendigo and Adelaide Bank: July Economic Update

The RBA’s decision to pause rate increases this month invites the question of how close we are to the top of the tightening cycle. Bendigo and Adelaide Bank Chief Economist, David Robertson explores the possibilities as we enter a new financial year. The welcome pause in the rate hike cycle at 4.1% in July was made possible by the latest monthly inflation data.

Unemployment

Mr Robertson highlights that this pause now gives the Reserve Bank the opportunity to compare the monthly inflation data for May with the full quarterly figures to June 30. It will also provide another read on labour markets on July 20, after the remarkably strong result for May when unemployment fell to 3.55%.

“This will be crucial for the August RBA policy meeting, as Philip Lowe continues to be vocal and insistent that higher wages driven by low unemployment and tight labour markets will only serve to feed through into ‘unit labour costs’, and so directly back into inflation,” he said.

“As a result, we still maintain another hike to 4.35% is imminent, and only a very favourable read from the quarterly CPI data would avert this outcome - or perhaps a jump in the unemployment rate, to demonstrate that higher interest rates are slowing the economy (and demand for jobs) quickly enough to manage inflation,” Mr Robertson said.

Inflation and Interest rates

Given the latest data in spending, employment and inflation, Mr Robertson says we can still expect at least one more RBA hike.

He also notes recession risks have also risen markedly since April, but that even if this is the peak in official rates, relief via rate cuts remains well down the track, as has been consistently forecast throughout this year.

“The pause was made possible by the latest monthly inflation data, showing annualised CPI had fallen from 6.8 to 5.6% in just one month,” Mr Robertson said.

“The RBA’s strong language after last month’s hike, warning about tight labour markets and high core services inflation, has left opinions finely balanced on the latest decision,” Mr Robertson said.

International markets

Mr Robertson further contemplates factors the RBA board will need to consider, including offshore developments as there is a similar pause in rate hikes in the US and a 50-basis point jump in the UK. While locally, trends in household spending, after the 0.7% jump in retail sales in May, is showing some resilience.

“Household budgets remain under pressure as monetary policy continues to bite, although house prices have crept higher again, by a further 1.1% in June,” he said.

“And lastly, stock markets globally are still riding a wave of AI exuberance, seemingly shrugging off any thoughts of recession, and placing faith in technology driving the next upswing- despite risk free rates rising to their highest level in a decade,” Mr Robertson concluded.