Inflation remains high and struggles to keep up with global easing, will the Reserve Bank of Australia maintain a hawkish tone at the August meeting?

According to the Zhitong Finance and Economics APP, due to the cooling inflation still at a high level, the Reserve Bank of Australia is required to maintain its key interest rate at the highest level in 12 years. Australia is expected to continue to lag behind the global easing cycle.

Economists expect that the Reserve Bank of Australia will keep the cash rate unchanged at 4.35% for the sixth consecutive time at the meeting on Tuesday. Australia's policy decision came after the highly anticipated meeting of the Federal Reserve last week, when Fed Chairman Powell hinted that the U.S. would begin easing monetary policy in September. The Bank of England also cut interest rates last week for the first time since early 2020 and hinted at further cuts in the future.

However, RBA Governor Bloxham is unlikely to adopt this strategy. Economists expect the RBA to debate raising interest rates again before agreeing to stand pat.

Citi economist Josh Williamson said, "The RBA cannot afford the cost of abandoning its hawkish stance. The RBA needs to convey a hawkish pause message, indicating that while there has been further progress on inflation, it is still too early to consider easing tightening policies."

Bloxham has retained maximum policy flexibility this year. She stated that she needs to be confident that price growth is sustainably returning to the central bank's 2%-3% target, so the board will not rule out any possibilities.

Data released last week showed that Australia's core inflation unexpectedly slowed in the quarter ending in June, prompting the money market to adjust the probability of a rate cut in December to 88% based on OIS contracts for the meeting date, and fully priced in a rate cut for February next year.

Last Friday, influenced by CPI data and the global shift to dovish policies by central banks, Australia's policy-sensitive three-year government bond yield hit its lowest level since April. The Australian dollar also fell against the U.S. dollar.

Despite this, the 3.9% core inflation rate is still well above the RBA's target. Economists expect the central bank's latest forecast not to deviate significantly from the current target, which is to bring CPI back into the range by the end of 2025 (excluding the overall price decline reflecting government energy subsidies).

The easing of price pressures has increased the confidence of economists, including former RBA Assistant Governor Luci Ellis, that rate cuts may start earlier. However, they believe that the central bank will continue to maintain a hawkish stance in the short term until they are confident about the price trend "In view of the lingering inflation risks, the board is not in a hurry to cut interest rates," said Ellis, Chief Economist of West Pacific Bank, "It is reasonable for the board to retain the wording of 'not ruling out any possibility' in post-meeting communications. We also expect interest rates to only gradually decline."

During this tightening cycle, the Reserve Bank of Australia (RBA) has taken an unconventional approach, with rate hikes lower than global peers - its key rate is 1 percentage point lower than the United States - in an attempt to sustain post-COVID-19 employment growth. The unemployment rate has remained surprisingly low at 4.1%, aided by strong government hiring at the state and national levels.

The RBA's lower cash rate may explain why inflation has proven to be tricky, and it may still be premature to say that price pressures have been defeated. The core CPI of 3.9% is still well above the bank's 2-3% target, and the RBA expects to reach this target only by the end of next year. Failing to meet this expectation would damage its anti-inflation credibility.

Bloomberg Economics economist James McIntyre said, "While we believe that a rate hike will be on the agenda at the August board meeting, our bet is that the RBA will currently choose to keep rates at a higher level in the long term."

Economists point out a key uncertainty in how households will respond to the income tax cuts and energy rebates implemented last month. In fact, government spending will increase before the 2025 election, and the RBA will be reluctant to signal the next rate cut too early.

Policymakers will also closely monitor immigration issues, as immigration has been a key support for the country's economy and a partial cause of inflationary pressures.

The latest data shows that in the last quarter of 2023, the annual net immigration figure is still close to a record 547,000 people. However, with a decrease in temporary visas and student visas, this trend appears to be slowing down.

UBS economist Nicolas Guesnon said, "UBS has long expected that strong immigration-driven population growth, in addition to fiscal spending, will boost consumer demand, asset prices, and inflation. However, if fiscal policy is tighter than expected, or if population growth slows below the government's planned level, the RBA will have room to relax monetary policy ahead of schedule."