Falling inflation, retail trades point to August rate pause
A pause on rates for August is looking likely with quarterly inflation and retail trade on a downwards trajectory, according to economists.
The Reserve Bank of Australia is likely to keep rates on hold at its monthly board meeting tomorrow with quarterly inflation data and monthly trade data showing positive signs for the fight against inflation, said CreditorWatch chief economist Anneke Thompson.
“While services inflation is still increasing, the main contributors to this – rents, insurance and utilities – are not at all responsive to increases in the cash rate, and it is unlikely continued inflation in these areas will convince the RBA to increase again,” said Ms Thompson.
Ms Thompson said the RBA is likely to wait for another month’s worth of data to come in with consumers and borrowers showing signs of being under significant financial pressure and capacity and utilisation and job vacancies falling.
“Quarterly retail sales volumes are released the day after the August decision, and this data will be factored into the September meeting results,” she said.
Retail trade fell in the month of June, with consumers less willing to spend in the mid-year sales compared to previous years.
“In a sign of just how much pressure consumers are under, retail spending fell in every category except food retailing, which only increased by 0.1 per cent in dollar terms,” said Ms Thompson.
“Given inflation figures for food items are well above this figure, it is highly likely that volume figures, even in the non-discretionary category of food, will have gone backwards when quarterly trade volume data is released this Thursday.”
Inflation is already showing signs of slowing across the world, with major economies well and truly past their inflation peaks.
“The USA peaked earliest, in June 2022, and gives us a good leading indicator of what Australia can expect over the next six months,” said Ms Thompson.
“The US economy grew faster than most expected over the June 2023 quarter, growing at a 2.4 per cent annualised rate. While this is good news for US businesses, and has reduced the outlook for recession in US, it does mean that the relative ‘heat’ in the economy may mean higher interest rates for longer, even if the peak in interest rates is near or has been reached.”
While unemployment remains steady, with the unemployment rate unchanged in July 2023, Ms Thompson expects that weakness will start to emerge in the labour sector during the second half of 2023.
“Major firms such as Telstra, Lend Lease and Westpac have announced redundancies as part of restructuring,” she said.
“We expect that as business conditions continue to weaken and profit margins fall, headcounts will get a lot of attention, particularly given the very strong headcount growth since the pandemic.”
The RBA will be closely watching forward labour force indicators, such as job vacancies and applicants per role, to get some comfort that conditions will ease later in the year.
“Forward looking job vacancy data suggests there are far fewer jobs available now that this time last year, however, still more jobs than were available pre-COVID,” she said.
AMP chief economist Shane Oliver said the RBA decision tomorrow will still be a “close call” despite the recent inflation data.
"We expect that the downside surprise in inflation and retail sales in the last week will see the RBA remain on hold at 4.1 per cent,” said Mr Oliver.
“The RBA is now getting what it wanted on inflation and the ongoing weakness in real retail sales highlights the high and increasing risk that it will knock the economy unnecessarily into recession if it keeps tightening.”
However, the RBA is likely to still be concerned about services inflation and wages and another 0.25 per cent hike is still a possibility, he said.
Dr Oliver said there is likely to be at least one more rate hike before the peak in interest rates is reached, with AMP expecting interest rates to reach 4.35 per cent, most likely in September.
“The bottom line is that the RBA is either at or close to the top and we continue to allow for rate cuts starting in February next year,” he said.
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