Brown Brothers Harriman’s (BBH) Elias Haddad highlights that above-target Australian inflation is keeping the risk of further Reserve Bank of Australia (RBA) rate hikes alive, with June and Q2 Consumer Price Index (CPI) data expected to show firm trimmed mean readings. Specifically, headline CPI is anticipated to remain at 4.0% year-over-year for a second consecutive month, while trimmed mean CPI is forecasted to rise to 3.7% year-over-year compared to 3.6% in May. The trimmed mean CPI is projected to reach a two-year high at 3.7% year-over-year in Q2, up from 3.5% in Q1, which sustains market expectations for potential RBA tightening [1].
Despite these inflationary pressures, Haddad assesses that the risks are skewed toward an extended pause in the RBA’s tightening cycle, citing sub-potential real GDP growth projections over the next two years and the current cash rate of 4.35%, which is near the top of model-based central estimates of the nominal neutral rate. This stance is viewed as a headwind for the Australian Dollar (AUD) [1].
Market pricing reflects these mixed signals, with RBA cash rate futures assigning a 30% probability to a 25 basis point hike in August and fully pricing in a rate increase to 4.60% by year end. Upcoming speeches by RBA Governor Michele Bullock and Assistant Governor Sarah Hunter may provide further policy guidance ahead of the next RBA decision scheduled for August 11 [1].
CONCLUSION
While persistent inflation keeps RBA rate hike risks alive, BBH sees the likelihood of an extended pause in tightening as a negative factor for the Australian Dollar. Market pricing remains cautious, awaiting further guidance from upcoming RBA communications.