Reserve Bank of Australia RBA

MUFG anticipates that the latest inflation data from Australia could prompt the Reserve Bank of Australia to consider another rate hike at its upcoming meeting on August 6th. The surprising uptick in inflation, coupled with fiscal stimulus measures and the RBA's current policy bias, strengthens the case for maintaining a hawkish stance.

Key Points:

  1. Inflation Data:

    • Australia's year-on-year CPI for May accelerated from 3.6% to 4.0%.
    • The trimmed mean measure increased from 4.1% to 4.4%, exceeding expectations.
    • This inflation data is concerning for the RBA and could influence its upcoming policy decisions.

  2. Market Reactions:

    • The 2-year government bond yield surged by 18bps following the inflation data release.
    • OIS pricing for RBA policy changes now indicates a greater than 50% probability of a 25bp rate hike by September.

  3. RBA Policy Bias:

    • Governor Bullock indicated at the last policy meeting on June 18th that the RBA was leaning towards a hike, with no discussion on the possibility of a rate cut.
    • The RBA stated the need for more "comprehensive" information on inflation to determine its next move.

  4. Fiscal Stimulus:

    • The government is expected to add fiscal stimulus to the economy, as noted in the RBA's analysis.
    • This additional stimulus could further support the case for a rate hike to manage inflationary pressures.

  5. FX Implications:

    • From an FX perspective, higher yields are supportive of the AUD.
    • The potential for a prolonged period before the RBA considers a rate cut reinforces the view of a gradual move higher for AUD/USD.

Conclusion:

MUFG sees the latest inflation data as a key factor that could push the RBA towards another rate hike in August. The combination of higher-than-expected inflation, fiscal stimulus, and the RBA's current policy bias supports a hawkish outlook. This scenario is likely to favor higher yields and a stronger AUD in the near term. Investors should closely monitor upcoming economic data and RBA communications for further indications of policy direction.

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