Despite the RBA having repeatedly expressed caution about relying on the ABS monthly CPI indicator, traders have again done so.
Yesterday’s rise in annual inflation to 3% (the very top of the RBA’s target band) has seen bets on a rate cut by November fall, taking the chances to roughly 50-50, as priced in the rates futures market.
CBA’s new head of Australian economics, Belinda Allen, says the Reserve Bank will face an easy decision to hold rates next week, followed by a very difficult call in November.
“The RBA are likely to find themselves in a tougher position than recent meetings,” she argues.
“There is real tension building in the data flow.
“The August CPI indicates material upside risks to Q3 inflation, a cyclical upswing in the activity data is also clear but there are signs of softer employment and moderating wages growth.”
In fact, RBA chief economist Sarah Hunter told Parliament earlier this week that the Australian economy appeared to be in an upswing at the moment.
That said, the upswing appears fairly moderate and interest rates, according to the RBA, remain restrictive, so perhaps there is still scope for one or two more cuts.
This is especially so with jobs growth having basically evaporated over winter.
“The last three months has seen employment gains of 23k, compared to 111k the prior three months,” Allen notes.
“The unemployment rate though has held steady at ~4.2%. Our CBA wages tracker also shows a clear moderation in wages growth.”
So, rising unemployment and rising inflation. Australia isn’t unique in finding itself in this position, but how will the RBA react?