Monday, June 17, 2024

RBA holds interest rates

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

RBA Governor Michele Bullock says 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.

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

Ms Bullock notes that inflation in Australia has passed its peak but is still too high and will remain so for some time yet.

“Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly, and fuel prices have risen noticeably of late. Rent inflation also remains elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3% target range in late 2025,” she says.

“Growth in the Australian economy was a little stronger than expected over the first half of the year. But the economy is still experiencing a period of below-trend growth, and this is expected to continue for a while. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.

“Notwithstanding this, conditions in the labour market remain tight, although they have eased a little. Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4.5% late next year. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.”

‘Correct’ decision

Deloitte Access Economics Head Pradeep Philip believes the decision to hold rates is the “correct one, and business and households will breathe a collective sigh of relief in a slowing economy”.

“Although inflation was slightly higher in August than it was in July, that increase was driven by an increase in the cost of more volatile items like fuel, energy, and holiday travel. If you exclude these items, underlying inflation in the year to August was lower than it was in the year to July,” he says.

“Price inflation across these more volatile categories is being driven by supply-side pressures, like global energy prices. As we have been saying for months, increasing the cash rate is only good for reducing demand-side pressures like consumer demand.

“There’s clear evidence of a slowing economy – with confidence waning, consumer spending weak, and the retail sector in the doldrums.

“Increasing interest rates in this environment would have simply added to the economic risks facing the economy.

“With supply side factors driving inflation, if we want to cool further price increases without tipping the economy over into recession while also addressing challenges like housing prices and climate change, we must prioritise productivity-enhancing macroeconomic reform.”

Welcomed by retailers

The Australian Retailers Association (ARA) welcomes the RBA’s decision.

“We’re pleased to see the RBA show restraint for a fourth consecutive month. The decision to hold interest rates again will certainly be a relief to Australian homeowners, businesses, and the retail industry,” says ARA CEO Paul Zahra.

“Retailers have turned their attention towards setting up for the festive season and so too are consumers beginning to think about Christmas gifts for their loved ones. At a time of immense financial pressure and hardship for some, avoiding another cash rate increase will have a positive impact on spending and retail preparations.

“Christmas and the holiday season are when discretionary retailers make up to two-thirds of their profits and hence, retailers need confidence to be able to invest in jobs during this time.

“The decision to pause interest rates will help bolster business confidence and again provides cautious optimism that they may have peaked.”

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