The RBA (Reserve Bank of Australia) will publish the accounts of its last meeting on Tuesday. That’s the meeting where Australia’s central bank surprised markets and analysts by keeping rates unchanged, rather than the expected cut. Since then, the labour data has deteriorated, and markets are once again sure that the next meeting will end with easing.
Given the strong expectations and shift in the data since the meeting, some analysts expect the minutes to be a bit “stale”. On the other hand, they could still surprise the market depending on what aspects the RBA focuses on as critical for a change in monetary policy. Analysts are still expecting labour markets to drive down interest rates, but that might not be what The RBA (Reserve Bank of Australia) cares most about.
Why the Surprise
A handful of economists ahead of the last meeting made the correct prediction that the RBA would hold out for at least one more meeting. Those economists said that the focus will be on inflation, and that the central bank will wait one more month to get better information on the trajectory of consumer prices. And that is essentially what The RBA (Reserve Bank of Australia) stated in its announcement.
In other words, the deterioration in the labour markets wasn’t as significant a factor as inflation. This makes sense, since The RBA (Reserve Bank of Australia) doesn’t have a dual mandate to support full employment, unlike the Fed. But the job market is relevant to inflation in the long term, and generally, it’s the long term that’s the concern for central banks.
Inflation vs Jobs
Generally, the inflation rate is a more immediate measure than the labour market. If the unemployment rate increases, consumer confidence typically declines. With less disposable income, people are less able to buy more expensive items, putting downward pressure on inflation. However, it takes several months for this effect to become apparent.
Central banks that don’t have an employment mandate need to pay attention to the job market for this reason. In Australia’s case, the unemployment rate is just rising above the structural level. Whether that will be a problem for inflation in a few months depends on how the economic outlook is perceived. If the economy is expected to remain resilient, then a slightly higher unemployment rate isn’t a problem for consumer prices. On the other hand, if an economic slowdown is expected, the unemployment rate is likely to continue rising. Ultimately, this would slow wage growth, and inflation could fall below target.
Pricing in Expectations
With markets expecting a rate cut at the next meeting, an emphasis on a solid economy and the importance of inflation could change the outlook for monetary policy somewhat. Even if a rate cut is announced in the August meeting, it could still have a hawkish bias if inflation remains high.
The medium-term outlook for the AUDUSD, therefore, could depend more on a combination of what the minutes reveal and what the Q2 CPI figures show when they are released at the end of the month. In the meantime, the stronger dollar could augment the persistent bias among economists that The RBA (Reserve Bank of Australia) will ease more.
