JPMorgan on Upcoming RBA Rate - FJElite
The RBA's August meeting appeared contentious as recently as a couple of weeks ago. However, following a softer 2Q CPI report, market expectations have converged to a highly likely on-hold decision this week. Having been proactive in tightening into a supply shock earlier in the year, the material undershoot on realised inflation outcomes gives the RBA room to pause. We have argued that the Australian inflation overshoot has been narrowly concentrated in goods and energy, supporting our view that May's hike would prove the last in the cycle. With measures of inflation breadth falling to multi-year lows in 2Q, despite the backdrop of a supply shock, the risk of second-round effects appears diminished. Perceived risk to price-setting behaviour was always front loaded and with base effects applying a mechanical headwind to the annual inflation rate in coming prints, inflation expectations concerns should also be easing.
We expect dovish forecast revisions in August's SOMP. The Bank's 4Q26 headline inflation forecast is likely to be lowered by 50bp to 3.5%oya, while trimmed mean inflation should be lowered by one to two tenths, to still sit slightly above the top of the target band. Recent declines in spot energy prices argue for a more pronounced adjustment in headline, but we think officials will err on the side of caution in extrapolating to broader disinflation through core. On the growth side, activity data have broadly tracked RBA forecasts, and we don't expect material changes.