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July RBA Board decision again likely to be a very close call; further rate rises still likely soon

• Ahead of tomorrow’s RBA July Board meeting, we consider the arguments for and against another rate increase at this month’s meeting. Like last month, there are arguments for moving rates higher and for holding rates steady.
• We find the arguments in favour of further tightening over coming months remain very strong as considerable cost and inflation pressures are likely to be in evidence in Australia (think award wages, rents, electricity, insurance, telecommunications and postage and council rates). And many firms seem to have changed their pricing behaviour, passing on very large price increases in recent times.
• However, the RBA has just made two further rate rises to manage these risks and there are greater anecdotal reports of consumers changing their spending behaviour.  It is also apparent the RBA wishes to minimise the rise in unemployment, and has tended to characterise the potential inflation and wages pressures facing Australia as less than in other jurisdictions. The RBA may well prefer to hold this meeting and wait for the Q2 CPI and updated forecasts in August. This suggests it’s likely to again be a very close decision.
• For the medium-term outlook for the economy and inflation, we are more interested in other data being released in the US this week (and at the end of last week). Last week, the core PCE deflator excluding shelter recorded a 0.23% m/m increase suggesting services inflation may not be quite as sticky as feared (this mirrored improvements recorded in the core sticky prices ex shelter component of the CPI earlier in the month). We continue to watch New Orders in the Non-Manufacturing ISM to see if Services can offset weakness in Manufacturing, and the Challenger Layoffs and Job Openings series. Layoffs have risen somewhat but are not at the rates typically associated with broad shakeouts in the US labour market. That’s likely because there are an extra 3 million job openings than pre-COVID. We receive updates on each of these important data points this week.

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