TD Securities interprets the Reserve Bank of Australia (RBA) May Minutes as reinforcing a preference to stay on the sidelines near term, with markets pricing only a small chance of a June hike. The Board views financial conditions as somewhat restrictive, but TD expects another rate increase in August as broader price pressures emerge in upcoming Consumer Price Index (CPI) data despite temporary fuel-related disinflation.

Board cautious but further hike expected

"The RBA May Minutes emphasized again the Board's preference to stay on the sidelines for now, which implies that the RBA will skip a hike at the June meeting."

"OIS markets are pricing the same skip scenario with only 20% odds assigned for a June hike."

"In the minutes, the Board members judged that financial conditions are somewhat restrictive after the May 25bps hike as the cash rate is likely near/above the RBA's nominal neutral interest rate estimate."

"Of concern to the Board is the rise in short-run inflation expectations as the increase in fuel costs would lead to broader inflation pressures as reported by their liaison program- an increasing share of consumer-facing firms are expecting above-average price increases over the coming year."

"We expect the RBA to hike again in August as broader price pressures become more evident in the coming CPI reports, despite the temporary cut in fuel excise duty reducing annual CPI inflation in April by 0.5%-pt in next week's monthly report."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)