Westpac senior economist Justin Smirk has dampened talk of interest rate hikes, noting that base effects in the volatile monthly CPI indicator will likely drag annual inflation down to 3.6% prior to the next RBA board meeting in early August.

“Westpac is forecasting the June Monthly CPI Indicator to gain 0.3% in the month which, with base effects, will see the annual pace ease back to 3.6%yr”.

“Westpac’s June quarter CPI near-cast remains 1.0%qtr/3.8%yr while the Trimmed Mean remains 0.9%qtr/4.0%yr”.

“For end 2024, the CPI is forecast to ease to just 2.9%yr due to the impact of the various cost of living measures”.

“The Trimmed Mean removes most of the volatility from cost of living measures, and so it will be the focus of the RBA during this period”.

“Trimmed Mean inflation will be down to a 3.5%yr pace by end 2024 and 2.8%yr at end 2025 highlighting a continued moderation in inflation”.

On Tuesday, the RBA released the Minutes of the June Board meeting, which stated that there wasn’t enough evidence to change the Bank’s view on inflation.

While the upside surprise to the May CPI indicator adds to the case to hike, the RBA Minutes also noted that wage growth has peaked, labour market risks are skewed to the downside, and there is uncertainty regarding the strength of the consumer.

The RBA’s remarks on the weakening labour market were especially pertinent:

“Members observed that the fall in vacancy rates, for example, could be taken as an indication that labour market conditions were already weaker than implied by trends in employment. Moreover, the unemployment rate could rise quickly once it did start to rise, as had occurred in the past”.

Given the RBA’s dual mandate of price stability and full employment, concerns surrounding the labour market reduces the likelihood of rate hikes.

The strength of this month’s June labour force release and the Q1 quarterly CPI print will not only determine whether rates are lifted in August, but also the potential timing of the start of an easing cycle.

A lower unemployment rate would challenge the RBA’s view, as would a quarterly trimmed mean inflation print of 1.0% or above.

Both Westpac and CBA are currently tipping a Q2 trimmed mean CPI print of 0.9%, which would see rates remain on hold.