RBA Preview: Banks split between a pause and 25 bps hike after softer inflation

The Reserve Bank of Australia (RBA) will announce its next monetary policy decision on Tuesday, July 4 at 04:30 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 10 major banks regarding the upcoming central bank's decision.

At the June meeting, the RBA raised the cash rate by 25 bps to 4.10%. The consensus is for the bank to keep interest rates unchanged; however, it is a close call.

ANZ

We don’t think the RBA will be swayed to pause by this month’s inflation result, with other data from the month less encouraging for the inflation outlook. We think the strength in this month’s employment data should outweigh any optimism on inflation. We think the quarterly CPI result in Q2, released in July, will be key to the RBA raising the cash rate in August.

BofA

We expect that the RBA will keep rates unchanged at 4.1% in July due to softer monthly inflation. This gives the RBA an opportunity to wait for Q2 CPI data due on July 28th, as well as another labor force release on July 20th. But there is a potential for a 25 bps hike in August, taking the cash rate to 4.35%. If the RBA holds rates in July, it may weigh on the AUD in the near term. However, the AUD's downside would be limited if the RBA signals that further tightening is likely.

ING

Following the surprisingly large fall in May headline CPI inflation to 5.6% YoY from 6.8% in April, there seems little prospect of the RBA hiking rates again following what, by its own admission, was a finely balanced decision in June. That hike only got over the line because of the large upward spike in April inflation, so it would seem extremely odd to hike again if inflation surprises on the downside. We are keeping an open mind on one final hike this cycle, and the September meeting looks like the most likely candidate to us. July CPI will have to absorb a large electricity tariff spike of 20% YoY, or more by some estimates, and the base effects are less helpful over the third quarter too. But that will probably be it for the RBA.

Standard Chartered

We expect the RBA to pause in July, but to hike by 25 bps each in August and September. The RBA meets every month (except in January) compared to the longer break between meetings for other developed market central banks. Hence, we think it is unlikely to hike at a trot. 

TDS

Another line-ball call with cons. expecting no hike and OIS market pricing in ~50% prob of a 25 bps hike. Contrary to cons., we expect the RBA to hike. The labour market is too tight, upside retail sales beat for May, rebound in domestic housing prices in June and elevated household savings provides room for the RBA to continue its hike to return inflation back to target.

UOB

We continue to emphasize that every meeting in the near term will be live. Following the latest employment data, we are now penciling in a 25 bps hike at the next monetary policy meeting on 4 Jul.

SocGen

We expect the RBA to maintain its cash rate target of 4.10% at its 4 July policy meeting, after the two 25 bps hikes in May and June, as in our view, it would be difficult for policymakers to implement such a rate hike for three months in a row following the significant decline in monthly inflation in May. We maintain our base-case scenario, in which we assume a terminal policy rate of 4.35%, under the assumption that the RBA will opt to ‘pause’ with no meaningful changes in policy statement in July. The likelihood of the terminal rate being higher than 4.35% would increase in the event of a rate hike and/or hawkish changes in the policy statement.

BMO

We still expect another rate hike on July 4, bringing the cash rate from 4.10% to 4.35%. Credit demand and job growth are still very strong, and 5.6% inflation, though at a 13-month low, is still well above the 2%-to-3% target. The debate will, once again, be between 25 bps and holding rates steady. (Will 15 bps finally make it into the discussion? Here's hoping... I'm not giving up.) It will likely be even more ‘finely balanced’ than it was in June but will tip over to the 25 bps hike camp. (Expect a more dovish tone, though.)

Wells Fargo

Despite the slowing in the latest inflation print, we still lean toward the RBA raising rates 25 bps to 4.35% at the July meeting. Our forecast is distinct from the consensus forecast, which is for the policy rate to remain unchanged at the July meeting, though we acknowledge it is a close call and would not be surprised if the RBA paused at this meeting.

Citi

The RBA will likely deliver another 25 bps hike. Although the decision will be once again ‘finely balanced’, we believe that the economic data has surprised on the upside. The most crucial upside surprise was the labour force survey in May, which saw the unemployment rate decline despite a record increase in the labour force participation rate. Elsewhere, services inflation remains sticky and house prices have rebounded further, implying that financial conditions need to tighten further. We believe the Bank should hike further by 25 bps in July and August.