Overview

• Following the RBA’s decision to lift rates to 4.1% at the June meeting, we upped our rate call to 4.35% by August. We are now tentatively adding an additional 25bp increase, taking the cash rate to 4.6%. Timing is less certain, and we pencil in 25bp increases for July and August.
• While inflation has clearly peaked, and we (like the RBA) see inflation returning to the band by 2025, the extended period of inflation above target amidst a tight labour market poses the risk of stronger wage and price expectations becoming imbedded.
• Taking rates to 4.6% will weigh more heavily on growth and we have revised down our expectations for growth over 2023 to just 0.5% and pulled back expectations for 2024 to around 0.9%. That sees unemployment rise more quickly and reach 5.0% by end 2024. More details on the forecasts will be in our Forward View to be released Tuesday next week.
• We still see the RBA cutting interest rates back towards neutral in 2024 as a “forward-looking” central bank sees the slowing in growth and unemployment rising (negating the risk of ongoing strength in wage expectations) and it becomes clearer inflation is returning to target.

While the recent run of activity data including our business survey clearly show the economy is now slowing – as consumer spending begins to stall – inflation and wage data still show that price pressures remain elevated. This was highlighted by the Q1 national accounts which saw GDP growth of just 0.2% q/q and increasing signs of rates and inflation weighing on the consumer, while dwelling investment (typically very sensitive to rates, but also in this cycle cost pressures) continued to fall. The household income account showed a further moderation in the savings rate.

The nominal side of the accounts reflects what we already know in terms of passing the peak in inflationary pressure, but both the DFD and consumption deflators remain elevated. Interestingly, average earnings per hour (the broadest measure of labour costs, including bonuses and other payments) while accelerating continues to track below 4%. However, nominal unit labour costs which adjust labour cost growth for productivity, continue to track very strongly rising 2% q/q and tracking at near 8% y/y.

For further details, please see the NAB Monetary Policy Update (13 June 2023)