Tuesday will be RBA Governor Philip Lowe’s last Board meeting before handing over to his Deputy, Michele Bullock. Lowe will offer his final words at the Anika Foundation luncheon on Thursday. Things have been going Lowe’s way of late as wages growth has failed to accelerate further, the unemployment rate has edged up and monthly inflation data has shown further significant deceleration. So the Australian rates market as well as economists expect the RBA to leave its cash rate unchanged at 4.10% tomorrow. As do we. The key focus tomorrow as well as Lowe’s speech later in the week will be the rhetoric. Bullock is already on the Board and in her public appearances has been sticking to similar rhetoric used by Lowe, so tomorrow’s decision statement and Lowe’s speech on Thursday are relevant for markets. There is not likely to be a structural shift in the central bank’s monetary policy with the change in Governor. The RBA has the luxury of time to sit and observe the impact of existing rate hikes, especially as the rate of mortgage rollovers hits a peak for 2023 this month. While we see some risk the RBA becomes more dovish on the back of the recent data flow, we think it will be too early for the central bank to declare victory over inflation and that it will continue to indicate “Some further tightening may be required…”. A monthly headline inflation reading of 4.9% YoY is still too high and this drop in inflation may moderate as more of services data populates the monthly CPI survey throughout Q3. Consumer spending and house prices have also rebounded. The RBA will want to observe the full impact on consumption of Australia’s co-hosting of the Women’s World Cup before feeling as though domestic demand has been reined in enough. The Australian rates market is pricing in less than a one-in-four chance of another 25bp rate hike this tightening cycle. The risk around this pricing is that Lowe is not dovish enough to meet this pricing.
