Tuesday, June 18, 2024

Interest rates on hold again

The Reserve Bank of Australia (RBA) has left interest rates on hold, with its cash rate target remaining at 4.1%.

This follows last month’s pause after interest rates had been increased by 4 percentage points since May 2022.

“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” says RBA Governor Philip Lowe.

“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”

Commenting on the decision, CreditorWatch Chief Economist Anneke Thompson says: “A better-than-expected inflation rate over the June quarter, as well as slowing retail sales growth points to cooling economic conditions.

“And while the unemployment rate is still at record low levels, the forward indicators of employment conditions all point to a much tighter jobs market going forward.

“These forward indicators include SEEK jobs vacancy data for June 2023, which are down 22.1% compared to the year prior.

“In addition, NAB’s Monthly Business survey shows capacity utilisation is down to 83.5%, which is the lowest read since April 2022. Capacity utilisation is a very good leading indicator of the unemployment rate, and falling utilisation typically means a higher unemployment rate in three to six months’ time.

“In a further sign of increasingly cooling economic activity, B2B trade payment defaults, as measured in CreditorWatch’s June Business Risk Index (BRI), was at record high levels and around 50% higher than this time last year. This means a record number of late payment defaults were lodged by one business against another, highlighting just how tight cash flow is for some companies.

“It appears that savings levels of both consumers and businesses are now having a considerable impact on consumers’ ability to spend on discretionary items and for some businesses to be able to pay their bills on time.

“Looking forward, it’s likely we will see upwards movement in the unemployment rate over the second half of the year, which will further reduce inflationary and wages pressure.”

Welcomed by retailers

The Australian Retailers Association (ARA) welcomes the RBA’s decision but remains concerned about the ongoing economic pressure for mortgage holders and retailers.

ARA CEO Paul Zahra says the retail industry – particularly small business – is still reeling after 12 interest rate hikes since May 2022.

“We welcome this further pause of the cash rate by the RBA which will help bolster business confidence and gives us cautious optimism around whether interest rates may be lowered in the near future,” he says.

“Continued interest rate hikes have the dual effect of reducing customer spending whilst also increasing business costs – during a time where the industry is already under enormous pressure.

“The data suggests that inflation has peaked, so it’s clearly important to carefully consider the repercussions of interest rate increases on Australian mortgage holders and businesses.

“There’s a lag effect around cost-of-living pressures in retail, and the full impact of interest rate rises are yet to be felt, with many hundreds of thousands of mortgage-holders still tipped to roll off fixed rate loans this year.

“Similarly for retailers, we expect many significant leasing cost increases and other cost-of-doing-business impacts are still yet to come.”

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