Here’s a forecast for a 25bp RBA rate hike next week – citing inflation not falling

ING responding to the inflation data from Australia today:

• If you wanted to find a reason to leave rates unchanged at the 6 August meeting, there is some support in the core numbers published today to say, “Let’s give the economy the benefit of the doubt”.
• The August decision is certainly more finely balanced today than it was yesterday.
• However, for us, the evidence to suggest that inflation, even if it is trending lower (debatable) is doing so too slowly is more compelling.
• Add to that, another strong retail sales figure for June (0.5% MoM after the 0.6% May figure) and you get a picture where domestic demand is holding up too well to allow for a satisfactory decline in inflation to the RBA’s target range over the medium term.
• We still favour a 25bp rate hike on 6 August to take the cash rate target to 4.6%.
• The initial market response to today’s data was for the AUD to weaken sharply, most likely due to the core inflation figures. Markets, which had been pricing about a 25% chance of an August hike priced it back out again. This seems like an overreaction to today’s figures, but maybe if the market is not pricing in a hike, the RBA will be less willing to surprise them…? We’ll know soon enough.

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I’m going to disagree with this take. I think the inflation data today gives the RBA enough reasons to not hike next week. The Bank meet on August 5 and 6.

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The data ICYMI:

• Australian Q2 core inflation +0.8% q/q (expected 1.0%)
• AUD/USD has dropped under 0.6500 after core inflation comes in lower than expected

AUD/USD is around 0.6495

This article was written by Eamonn Sheridan at www.forexlive.com.