The Reserve Bank of Australia will probably only weigh up two cases – to hike or to hold its cash rate – before revealing its verdict at 2.30pm on Tuesday (AEST).
The central bank appears unlikely to lift interest rates after weaker than expected inflation figures came out last week, but it will consider the price rises as well as labour figures and GDP in its decision.
The case for a rate rise
Despite the cash rate remaining at a 12-year high of 4.35% since November, the inflation dragon hasn’t entirely been smote.
June quarter inflation figures showed headline inflation quickened to an annual rate of 3.8% from 3.6% three months earlier. The result was in line with the RBA’s forecast and the fact it wasn’t higher contributed to a fall in expectations that the central bank’s next move would be an interest rate cut.
Core inflation edged lower to 3.9%, from 4% in the March quarter and 4.2% at the end of 2023. But it was faster than the 3.8% the RBA had forecast and the board will debate whether inflation remains on track to slide within its 2%-3% target range by the end of 2025.
“The economy is not responding to this level of interest rates in a way that I think we can be confident inflation is going to come down,” said Warren Hogan, an economist at Judo Bank and a prominent “hawk” who has been calling for at least one more rate increase.
The “big shock” from 13 rate rises of 425 basis points – the most in more than 30 years – was “now starting to come out of the economy” as the last of the low-interest fixed-rate mortgages ran out, Hogan said.
“The bottom line is that the real interest rate doesn’t appear to be high enough,” he said. “Most of history” suggests interest rates “probably north of 2%” above inflation were needed to bring inflation to heel, he said. “It’s only just above zero.”
At its June meeting, the RBA said a case for a rate rise “could be further strengthened” if supply in the economy was “likely to be more constrained than had been assumed”, not least because “productivity growth remained very weak”.
Productivity growth “is dead”, Hogan said, and the July purchase managers’ index showed both input and output price pressures picked up again.
Producer prices, which track input costs, have also risen for the past year and reached 4.8% in the June quarter, the highest since the March quarter of 2023, the Australian Bureau of Statistics said on Friday.
The case for holding rates steady
The RBA governor, Michele Bullock, has made clear the bank was “vigilant to upside risks to inflation” to ensure the public didn’t become inured to large price increases. In the long term, these hurt people who less well off rather than those with deeper pockets.
Those sentiments are likely to remain in Tuesday’s statement.
In its June minutes, the RBA board noted the case for staying put would be strengthened if “risks to the outlook for the labour market were seen to be to the downside”.
The unemployment rate ticked higher in June to 4.1%, equal to the level reached in January and April. The last time the rate was higher was January 2022.
The RBA’s mandate also includes maintaining “full employment”, which is probably about the current level, so the board won’t want to see a surge in joblessness.
As noted by the Australian Council of Social Service, many labour gauges worsened in June from two years earlier. Entry-level job vacancies declined almost one-third, 100,000 more people were unemployed and a similar number underemployed.
Gross domestic product showed growth in the first three months was just 0.1%. Excluding the Covid era, the 1.1% annual pace was the slowest since the March quarter of 1991.
A rate rise now would add headwinds to an economy already close to stalling.
How might uncertainties sway the decision?
Uncertainties are unavoidable at the best of times – and these aren’t those.
The RBA board has noted consumer behaviour remains a bit of a puzzle. People spent more than expected at the start of this year, mostly by drawing down savings.
Will the bank’s liaison teams pick up evidence that households have celebrated the start of the stage-three tax cuts – worth $23bn this year alone – by spending up?
And from 1 July, all households also received $75 to help with energy costs, with similar payments coming for the next three quarters. Those rebates were topped up with pre-election freebies of as much as $1,000 in Queensland and $350 in Western Australia.
These payments do help lower the headline inflation rate but will people spend or save those handouts?
On the other hand, central banks in Canada, Europe and the UK have all started to cut interest rates and the US will likely follow next month.
The return of market volatility – fuelled partly by the bursting of the artificial-intelligence tech bubble, fears of a US recession, and renewed concerns about a wider Middle East conflict – also weighs against a RBA August rate rise.
Bullock likes to say “nothing can be ruled in or out”, but the chance of rate hike tomorrow looks diminishingly small.
