The RBA is getting close to, or may even be at, the top of its current rate hiking cycle based on some of the recent economic data. The April labour force report showing a 4,300 fall in total employment and the unemployment rate lifting to 3.7% plus the earlier report that real retail sales in Q1 fell by 0.6% q-o-q could both be signaling that economic growth and labour market conditions may soften enough to bring down inflation to 2-3% range by mid-2025.

Other indicators, however, are still indicating that getting inflation down to target is still not a safe bet. The Q1 wage price index reading showing wages up 0.8% q-o-q, 3.7% y-o-y when taken together with Q1 productivity showing GDP per hour worked down 1.4% q-o-q and down 3.5% y-o-y shows that annual wage growth is already limiting the likelihood of getting inflation down to 3% over the next two years. Also, housing activity and house prices are showing signs of revival, complicating the task of reducing inflation to target.

The RBA is in a difficult position approaching its policy meeting in two weeks. It will need to decide whether to rely on the recent softer retail sales and labour market data as evidence that it is on track to get inflation back to target by mid-2025 – the case for pausing – or whether the wage and housing data demand another hike. Making a decision to pause more difficult than is widely appreciated is the risk that not lifting interest rates enough now to bring down inflation sufficiently will require another round of rate hikes a year or so down the track taking the cash rate much higher than where it stands currently. The RBA is well aware that pausing comes at significant risk of paying later.

A growing concern for the RBA is that wage growth without growth in productivity will keep inflation unacceptably high. The Q1 annual productivity reading was almost certainly unusually weak beset by flooding events and supply chain issues cutting output, but even with some rebound likely over the next quarter or two productivity is not likely to lift much above zero annual change. Without productivity growth, wage growth will tend to support growth in prices.

Recent talk around wages including the push for a 7% lift in the minimum wage, public sector wage negotiations starting with a 4% lift in year one, several private sector negotiations starting at 4.5%+ in year one and the age care deal with a 15% lift from July 1, all point to annual wage growth pushing above the 4% y-o-y peak forecast by the RBA late this year. Barring a substantial lift in productivity, the wage changes being delivered and under negotiation now are tending to pressure the RBA to hike the cash rate again.

It is worth noting that it is cost-of-living compensation that is driving the current wage push and compensation for where inflation has been, not where the RBA is forecasting it will go. Current wage negotiations are getting closer to the point of rising prices driving rising wages which in turn are keeping inflation relatively high.

Housing is also shaping up as a continuing inflation concern. The lift in variable home mortgage interest rates so far reinforced by the beginnings of the fixed-rate mortgage refinancing cliff, while causing financial pain for many households, is not sufficient it appears to prevent a resurgence in home buying activity starting to push up prices. The value of new home loans jumped 6.5% m-o-m in March while house prices have risen in the major capital cities in March and April with the biggest increases in Australia’s most expensive city, Sydney.

Special factors are in play helping to explain the resurgence of home buying in the face of rising mortgage interest commitments. House prices had fallen the most in 40 years through 2021 and 2022 making still expensive homes seem a relative bargain. Supply of new homes and homes for rent are limited. Existing home listings are low. Underlying demand for housing, however, is rising fast driven mostly by the immigration catch-up after border closures through the pandemic.

These special factors limiting the supply and increasing demand for housing are unlikely to resolve quickly. Unless the RBA is prepared to lift interest rates much higher to cruel demand for housing and stop rising house prices (a policy response that we do not expect in the near term) rising house prices and rents are likely to slow progress getting inflation down.

Returning to the rate decision the RBA will take in two weeks, there are other economic releases to throw in to the mix. April retail sales out on Friday will show if household spending growth is continuing to moderate. An outcome around market expectations of +0.2% m-o-m or weaker (retail sales rose 0.4% the previous month) would be soft enough to add more fuel to the case for a rate pause.

The RBA will also see various Q1 reports in the week before its meeting including business indicators (growth in wages paid in this report will add to the information provided in the Q1 wage price index), government finances and net exports. The full Q1 GDP growth report containing the information about productivity will be out the day after the RBA meeting.

On balance, while there is information already out that provides some case for a rate pause, key wage growth information says that if the RBA does pause it is likely to pay later. It is a lineball call, but we suspect the RBA may hike the cash rate 25bps to 4.10% in June.