CPI figures could ‘make or break’ case for rate hike

All eyes are on the upcoming June quarter Consumer Price Index (CPI) data due to be released by the Australian Bureau of Statistics (ABS) tomorrow morning (Wednesday, 31 July).

Following a surge in the monthly CPI for May, which saw the indicator rise 4 per cent for the month, chatter around a potential rate hike in August began swirling among economists as signs of re-accelerating inflation were beginning to show.

Adding to the concern was the heightened state of vigilance expressed by the Reserve Bank of Australia (RBA) towards the upside risks to inflation, suggesting that the central bank may be losing patience in its fight against inflation.

Judo Bank’s economists Warren Hogan and Matthew De Pasquale referred to the upcoming CPI print as “probably the biggest economic data release of the year thus far”.

“If we get a core inflation number of 1 per cent on Wednesday the RBA will potentially need to hike rates the following week, while a result of 0.8 per cent or lower might see them wait it out,” they said.

“The RBA has made it clear that they are watching the quarterly CPI numbers to inform their views on the underlying trend for inflation.

“After a stronger-than-expected 1 per cent increase in core (trimmed mean) inflation in 1Q, the market will be looking for a trigger for another rate hike from the RBA. Most analysts believe a 1.1 per cent core inflation result will force the RBA to hike rates although many think an increase of 1 per cent is enough.”

Commonwealth Bank of Australia (CBA) economist Stephen Wu said the June quarter CPI figures would “make or break” the cause for an August rate hike, adding that while the lift in the unemployment rate does not warrant a hike, it would “not stand in the way of a rate hike if the June quarter CPI data comes in too hot”.

“We expect 2Q24 headline CPI to print in-line with the RBA’s latest forecasts from May. But for the trimmed mean CPI to come in a touch stronger,” Wu said.

“We believe our 2Q24 inflation forecasts are consistent with monetary policy on hold in August. Specifically, we expect a trimmed mean CPI of 0.9 per cent/qtr or less would see the RBA leave the cash rate on hold in August.

“An outcome of 1.1 per cent/qtr or above would mean an August rate hike is more likely than not. A 1.0 per cent/qtr outcome is in the ‘grey zone’ and the underlying details at the component level will be crucial.”

Interestingly, ANZ’s economics team said that over the past 25 years, the RBA has “never hiked rates within three months of the RBNZ, US Federal Reserve and Bank of Canada all easing”.

“As to what number might cause the RBA to tighten, there is no automatic outcome. But a 4.1 per cent y/y on trimmed mean and headline would be an uncomfortable outcome and present the RBA Board (and us) with a difficult judgement call,” it said.

“But even 4.1 per cent y/y on the trimmed mean and headline doesn’t preclude the staff forecasts showing a credible path back to target by 2026.”

The RBA is due to meet on Monday (5 August) and announce its decision on the official cash rate on the afternoon of Tuesday (6 August).

[RELATED: Monthly CPI surges]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

E-mail Adrian at: This email address is being protected from spambots. You need JavaScript enabled to view it.