The latest data has broadly evolved in line with expectations, and is continuing to signal that the economy is operating beyond capacity; employment has broadly held steady since May, suggesting that there is very little additional labour force capacity in the local economy. This is generating domestic inflationary pressures which are combining with global supply shocks, and warranting further monetary tightening from the RBA.

But the inflationary headwinds in Australia are much less pronounced than elsewhere, which will allow the RBA to keep the cash rate below other central bank policy rates. While this will put downward pressure on the AUD and potentially generate further inflationary pressures, the stronger economic environment and continued strength in commodity prices will push against this, and should limit a further depreciation of the currency – the AUD has held steady at around 0.63 US cents in recent weeks, despite the divergence in market views on the outlook for local interest rates.

Moving through 2023, assuming no further supply side shocks, the headline rate of inflation should ease, and with monetary and fiscal policy now putting a drag on growth moment – the economy is likely to expand by less than 2% in calendar year 2023 – attention will turn to interest rate cuts towards the end of the year. Given the inherent uncertainty in the outlook it is too early to say whether a rate cut will definitely be appropriate in late 2023 or the first half of 2024, the timing for the next cycle will be critically dependent on the extent of the acceleration in wages growth and the speed with which the current cost push inflation eases.