RBA preview: Status quo but back to a hawkish stance

Inflation is not only sticky in the US but also in Australia and with a very same flavor: prices of tradable goods are disinflating but not those of services. While prices of tradables decelerated sharply to +0.9% YoY in Q1-24, the decline in the headline CPI was limited to +3.6% YoY, which is still above the Reserve Bank of Australia (RBA)’s 2-3% inflation target range (Chart 1). The main reason is that non-tradables (mainly services), which are largely influenced by domestic factors, remained elevated at +5.0% YoY. In fact, rents sharply rose by +7.8% YoY, the highest increase since 2009, as the housing market has been resilient on the back of a tight labor market. As a consequence, the weighted median, RBA’s measure of underlying inflation was flat at +4.4% YoY in Q1-24.Sticky inflation does not help for cuts, but it is still a flat record, not enough for a hike in our view, especially given the slowdown in activity and, still, some market participants are already there in terms of expectations. After the RBA aggressively tightened to stabilize inflation, higher mortgage payments, which is estimated by the Reserve Bank to rise to about 10.5% of household disposable income, have eroded consumers’ purchasing power. These developments have weakened nominal retail sales to +1.6% YoY in February on the back of falling consumer confidence (Chart 2). Furthermore, the job market has begun to show early signs of cooling with job vacancies, a leading indicator of employment, declining by -12.4% YoY in March. Therefore, further tightening seems unwarranted.On the other hand, easing now might be counterproductive given the strength of the USD and the hawkish Fed on the back of a resilient US economy and stronger than expected inflation. The Aussie has already depreciated by 5% year to date. Hence, a rate cut by the RBA could weaken the Aussie further, which would in turn fuel inflationary pressures in Australia.Therefore, after balancing the risks of rate hike on growth and rate cut on the Aussie and, thereby, inflation, the RBA is expected to pause on May 7th but with a hawkish tone given sticky inflation in Australia and the return to a harsher tone by the Fed.