Monday, May 20, 2024

RBA rate holds steady as retail volumes fall

Australian retail sales volumes fell 0.4 per cent (seasonally adjusted) in March quarter 2024, according to figures released this week by the Australian Bureau of Statistics (ABS).

This follows a rise of 0.4 per cent in December quarter 2023 and a fall of 0.2 per cent in September quarter 2023.

Ben Dorber, ABS head of retail statistics, said: “Retail sales volumes fell for the fifth time in the past six quarters as consumers cut back on buying large household items such as furniture and electronic goods.

“The only rise in volumes over the past 18 months was the December quarter last year as extensive discounting from Black Friday sales boosted volumes.”

Retail sales volumes were down 1.3 per cent compared to March quarter 2023. This is the fourth straight fall in volumes when compared to the same time last year.

RBA holds cash rate

At its meeting on Tuesday, the RBA decided to leave the cash rate target unchanged at 4.35 per cent.

Inflation remains high, the Board said in a statement, and is falling more gradually than expected.

“Household consumption growth has been particularly weak as high inflation and the earlier rises in interest rates have affected real disposable income,” the Board said.

“In response, households have been curbing discretionary spending and maintaining their saving. Real incomes have now stabilised and are expected to grow later in the year, supporting growth in consumption. But there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.”

Retailers welcome May cash rate relief

The Australian Retailers Association (ARA) welcomed the RBA’s decision, with CEO Paul Zahra saying it will provide a hint of relief for retailers as economic challenges continue to dampen discretionary spending and consumer confidence.

“At a time of immense financial pressure and hardship for many Australians and retail businesses – avoiding another cash rate increase is critical to consumer confidence,” he said.

“March’s retail performance remained subdued, with cost-of-living pressures taking their toll on discretionary spending categories.”

“Higher interest rates are a major factor in this spending slowdown. Whilst we haven’t seen an increase since November, higher mortgage repayments are taking a toll on household budgets,” he said.

Sobering news for businesses

While the RBA’s decision to hold interest rates steady is welcome, Innes Willox, CEO of the national employer association AI Group warns a deeper reading of the decision is “deeply sobering news” for Australian businesses and households.

“We face the prospect of higher inflation for longer and further interest rate hikes sadly cannot be ruled out,” he said.

‘While some businesses continue to do well, many more are treading water and data clearly indicates business closures are rising. For many businesses, particularly across construction, retail and hospitality and all those that service them, the current economic conditions are feeling increasingly recessionary.”

He warns that the prospects for the next six months are not rosy, as an increase in unemployment is expected through the rest of this year as the economy tightens and households are forced to rein in spending.

“Today’s forecasts are a clear message that next week’s budget cannot pour fuel on the inflation fire and the Government must be very cautious with its spending priorities,” Mr Willox said. “The upcoming minimum wage decision must also not add to inflationary pressures. If not, the inflation and interest rate pain for businesses and households will be prolonged and increasingly difficult.”

Wait and see

Deloitte Access Economics partner, Stephen Smith, says the fact that the RBA kept interest rates on hold after a stronger-than-expected CPI print for the March quarter may indicate that the central bank acknowledges that interest rates cannot easily tame supply-driven inflation.

“As we have been saying for months, the inflation in the economy is primarily led by supply-side factors like the cost of housing, energy, and fuel. Rate hikes do not impact the cost of the latter two and actively increase housing costs,” he said.

“Additionally, last month’s CPI print was heavily influenced by increases to insurance premiums and one-off annual changes to school fees.

“Meanwhile, retail sales growth is at record lows, and showing no signs of suddenly roaring back to life. This is not a sign of an economy that needs another rate hike,” Mr Smith said.

Deloitte Access Economics expects inflation will decelerate faster than the official estimates, prompting the RBA to cut rates in November.

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