The ASX tumbled today. The S&P/ASX200 dropped 23.60 points or 0.32% to 7,243.50, crossing below its 125-day moving average.
Over the last five days, the index is virtually unchanged but is currently 4.28% below its 52-week high.
The market today may have reacted to hawkish Reserve Bank of Australia (RBA) minutes. The RBA minutes suggested the recent hike in the cash rate was due to "upside risks to inflation".
To hike or not to hike, that is still the question?
In a positive sign, the minutes stated that inflation had peaked and was now slowing but the top of the target band was unlikely to be reached until 2025.
Inflation is currently at 7%; the top of its target is 2 to 3%.
The minutes noted, "consistent with the bank’s mandate and objectives, it left little room for upside surprises to inflation given that inflation would have been above the target for around four years by that time.
“Members observed that the forecast for inflation to return to the top of the target band by mid-2025 was predicated on productivity growth returning to around the modest pace recorded prior to the pandemic,” the minutes said.
“If this did not occur, growth in unit labour costs would be uncomfortably fast.”
ANZ bank expects to see one further 25 basis point rate hike.
"The discussion on the upside risks to inflation and price setting behaviour, plus the ongoing tightness in the labour market and weakness in productivity are all concerns that could linger for some time," ANZ head of Australian economics Adam Boyton said.
"We see the risks around our expectation of one final 25bp rate hike in August being that the RBA hikes more and or sooner than we anticipate."
"Easing remains some considerable time off."
Goldman Sachs (NYSE:GS) believes the risks have been reinforced.
“The risks to that forecast remain skewed to the upside – and particularly given recent developments on fiscal policy, reform of the RBA, and in the housing market,” GS Australia chief economist Andrew Boak said.
"With the RBA’s new emphasis on strong growth in nominal unit labour costs, updates on the labour market – including the upcoming decision on the minimum wage and National Accounts – are key to watch over the coming weeks."
Meanwhile, NAB noted the need for a pick-up in productivity growth.
"Key according to these minutes is whether there is evidence that productivity will pick up to ensure the wages growth forecasts contained in the May statement on monetary policy are consistent with the RBA’s forecasts," NAB head of market economics Tapas Strickland said.
"That suggests the July RBA meeting is live, while June also cannot be ruled out if WPI printed stronger than the RBA’s 0.9% expectation."
The last of the four majors, noted the RBA’s willingness to keep raising the cash rate, however, the economic data will need to match the move.
"Put another way, we do not think the RBA will lift the cash rate again if the economic data prints in line or weaker than their forecasts," CBA's head of Australian economics, Gareth Aird said.
One set of figures that may sway a decision toward a hike is Wednesday’s wages figures.
“Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve,” the minutes said.
If there is no increase in productivity, nominal wage rises of 3.4 to 4%, would not be consistent with the inflation target.
Labour productivity currently sits where it did three years ago, having fallen 4.2% from its March 2022 peak.
An increase in productivity is necessary.
“Various factors might explain the weak productivity outcomes, including COVID-19-related disruptions and strong growth in employment in government-funded services, where achieving productivity increases is often difficult,” the minutes said.
The jobless rate remains at near 50-year lows of 3.5% in March, but services inflation rose its fastest in 20 years from January to March this year.
“That information also pointed to upside risks to the outlook for inflation,” the minutes said.
“If these risks materialised, they would further delay the return of inflation to target, with the prospect of a damaging shift in inflation expectations.”
Following the release of the minutes, RBA governor Phillip Lowe urged Australians to put their shoulder to the wheel to raise productivity growth.
“That’s the only way we can have faster growth in real wages. It’s the only way to support the budget, where there are increased needs. And it’s the way to improve our living standards,” Lowe said.
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