Reserve Bank Signals Potential for Further Rate Hikes Amid Stubborn Inflation

The Reserve Bank of Australia (RBA) has signaled its commitment to controlling inflation, stating it will take necessary actions, including potentially increasing the cash rate target, even if it leads to further rate hikes. Minutes released from the RBA board's June 16 meeting reveal ongoing concerns about elevated underlying inflation, despite some recent indications of easing price pressures.

The central bank maintained the cash rate at 4.35 percent at its June meeting, marking the end of a period of three consecutive increases. The RBA acknowledged the positive impact of falling oil prices and stronger equity markets, as well as the intended effect of the year's previous rate hikes on the economy. Data from the Australian Bureau of Statistics showed a decrease in the consumer price index to 4 percent year-on-year in May, down from 4.2 percent in April.

However, the RBA's preferred inflation measure, the trimmed mean, saw an increase from 3.4 percent in April to 3.6 percent in May. Policymakers cautioned that underlying inflation remains too high and is expected to rise in the June quarter. The RBA indicated that it could take up to two years for inflation to sustainably return to its target range, fueling concerns about a potential rate increase in August.

"It would take some time to assess the ultimate impact on the economy of the tightening in monetary policy since February but, at this stage, it appeared to be having broadly the expected effect," the minutes stated. The board also observed a weakening in housing demand, influenced by a softer economic climate and proposed tax changes. Despite these factors, the possibility of further rate increases remains on the table.

"The Board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome, including increasing the cash rate target if necessary," the minutes added. Widespread cost pressures persist across the economy, with many businesses reportedly passing on increased expenses to consumers.

Shane Oliver, chief economist at AMP, forecasts a 60 percent probability of another rate hike in August, a figure significantly higher than current financial market expectations. Oliver cited stubbornly high underlying inflation, the ongoing impact of higher oil prices, and rising wage growth contributing to business costs as factors supporting his view. Recent data on employment and household spending also suggest the economy is showing more resilience than anticipated despite the previous rate increases.

"With the trend remaining up in trimmed mean inflation, second round impacts of the oil supply shock still feeding through and the acceleration in minimum and award wages likely to add to costs and prices, at the same time that May data for jobs and household spending indicate that the economy is still holding up well, we remain of the view that the RBA will raise the cash rate again with the next hike in August," Oliver said.

However, Oliver noted that an August rate hike is not a certainty. Softer-than-expected inflation figures for the June quarter, coupled with evidence that previous rate hikes are cooling the property market, could lead the RBA to maintain the current rate. "That said the risks to June quarter trimmed mean inflation are slightly on the downside to the 3.8 per cent year-on-year forecast and along with evidence that rate hikes are working to cool property prices means that an August hike is not a certainty," he stated. Oliver believes financial markets may be underestimating this risk, estimating the probability of a hike at 60 percent, well above the money market's 20 percent.