RBA Monitor: Strong domestic inflation and hawkish rhetorics from Reserve Bank officials leading to 25-bps hike in September

Key arguments

• Q2 GDP growth accelerated to +0.4% QoQ from +0.3%, suggesting capacity shortage is larger than the RBA expected and inflation more sticky.
• July CPI surprised on the upside; trimmed mean held at +3.6% YoY, keeping inflation well above the 2-3% target for longer.
• RBA officials turned hawkish in September: Hunter said inflation risks are skewed to the upside and domestic factors are concerning; Hauser said people are furious about inflation and support bringing it down.
• Natixis now expects a 25bps hike to 4.60% on September 29, with a risk of an additional hike in November if Q3 CPI does not decelerate.

Corresponding source evidence

1. These results suggest that capacity shortage could be larger than the RBA had expected, implying inflation would be sticker than their views.
2. In fact, the CPI in July surprised on the upside, increasing the risk that inflation would remain well above the 2-3% target range for longer than the RBA ’s view .
3. The trimmed mean was flat at +3.6% YoY in July from June (Chart 2).Hence, with the economy holding up better than expected, more rate hikes could be needed to stabilize inflation.