Commerzbank’s Volkmar Baur sees only a 50% market-implied probability for another Reserve Bank of Australia (RBA) hike this year and disagrees with that pricing. He points to fading energy-related upside risks and emerging downside risks from falling real estate prices, arguing that inflation would need to rise significantly for the RBA to tighten again, which he does not expect.

Housing and inflation temper RBA

"The Reserve Bank of Australia (RBA) is not holding a monetary policy meeting this month. The next meeting will not take place until August. As a result, the data currently being released is of only secondary importance for the Australian dollar—and interest rate expectations regarding the RBA also appear to have changed very little in recent days."

"The market still expects another interest rate hike this year with a probability of around 50%. We continue to believe that this will not happen."

"Regarding risks, the discussion primarily centers on an ongoing conflict in Iran and the associated high fossil fuel prices. However, the price of oil has only continued to fall since the last meeting. So this risk no longer exists for the moment."

"According to Cotality, nationwide real estate prices fell by 0.4% in June compared to the previous month - the sharpest decline in three years. For the second quarter, this would amount to a 0.7% decline compared to the previous quarter. In Sydney and Melbourne, prices actually fell by more than 1% each in June compared to the previous month. The trend thus suggests that prices are not only continuing to fall - the decline appears to be accelerating."

"On the other hand, the downside risks mentioned refers to a possible significant decline in real estate prices and alludes to our second point. Such a decline could have a negative impact on consumer spending and thus weigh on the economy. And the latest data suggest that something could be developing in this regard. "

"The risk profile therefore seems to be shifting. In our view, inflation would have to rise significantly for the RBA to raise interest rates again this year. And as mentioned, we do not expect this to happen."

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