Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent, in an interview, maintained a cautious stance despite recent inflation data showing a "touch softer" Consumer Price Index (CPI). He highlighted that even though the headline inflation eased to 3.8% in the 12 months to June, down from 4.0% in May and below economist expectations, services inflation remains a concern. The RBA's preferred measure of core inflation, the trimmed mean, held steady at 3.6%, still above the central bank's target range of 2% to 3%. This persistence in services inflation, particularly in areas like housing costs (up 6.8% annually) and rents, is a key factor influencing the RBA's outlook.
Kent also pointed to the "bit tight" labor market, noting that while the unemployment and participation rates in the June quarter were higher than the RBA's May forecasts, the market continues to exhibit tightness. This tightness, combined with ongoing concerns about services inflation and potential future price increases from factors like the winding back of fuel excise cuts and rising oil prices (now above $100 a barrel due to Middle East conflict), suggests that the RBA's work on inflation is not yet done. Governor Michele Bullock had previously warned that the board's patience for inflation outside the target band was wearing thin.
Following the CPI data release, market expectations for an immediate August rate hike plummeted from about 20% to around 3%. Consequently, several major banks adjusted their forecasts, with Westpac, for instance, reversing its prediction of two more rate hikes this year to instead anticipate the RBA holding rates for the remainder of 2026. However, traders are now pricing in an over 80% chance of another rate hike by the end of the year and more than 95% by February, indicating a belief that the RBA may still need to act if inflation does not consistently trend towards its target.
