Thursday, June 20, 2024

Retailers welcome third consecutive interest rate pause

At its meeting today, the Board of the Reserve Bank of Australia decided to leave the cash rate target unchanged at 4.1% and the interest rate paid on Exchange Settlement balances unchanged at four per cent.

“Interest rates have been increased by four percentage points since May last year. 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 Rowe. “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.”

“Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline. But inflation is still too high and will remain so for some time yet. While goods price inflation has eased, the prices of many services are rising briskly. Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025,” Mr Lowe said.

The Australian economy is 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,” he said.

The Australian Retailers Association has welcomed the Reserve Bank of Australia’s decision to hold cash rates at 4.1% for the third consecutive month as inflation continues to plateau.

The decision comes after the latest Australian Bureau of Statistics retail trade data revealed most categories remain in decline amid a discretionary spending slowdown due to cost-of-living pressures.

ARA CEO Paul Zahra welcomed the reprieve in September’s monetary decision, giving the retail industry “cautious optimism” heading into the busiest trading season of the year.

“We’re pleased to see the RBA show restraint once again. The decision to hold interest rates for a third consecutive month will certainly bring relief to Australians, businesses and the retail industry,” Mr Zahra said.

“As we move towards the all-important Christmas trading period, each monetary decision by the RBA will have an important bearing on spending across the country.

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

Mr Zahra said the retail industry – particularly small business – is still reeling after 12 interest rate hikes since May 2022.

“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,” Mr Zahra said.

“It would appear inflation has peaked and is in decline, so the top priority should now be minimising financial stress on Australian mortgage holders and businesses.

Mr Zahra pointed to the latest retail trade data as a bellwether of the discretionary spending slowdown.

“For the second consecutive month, all non-food related retail categories have remained in year-on-year spending decline,” he said.

The ABS last week revealed the monthly consumer price index (CPI) rose 4.9% in the year to July, down from 5.4% the previous month and under market forecasts of 5.2%.

Deloitte Access Economics Partner Stephen Smith says today’s decision suggests the Reserve Bank is increasingly realising the precarious position the Australian economy is in following the rapid increase in interest rates since May 2022.

“This is borne out by the facts. Monthly inflation indicator data released last week shows inflation continues to cool as supply-side factors abate, while the cumulative impact of 12 earlier rate hikes forces Australians to tighten their purse strings. Household spending was lower in July 2023 compared to 12 months earlier – the first time since February 2021 that this spending indicator has fallen,” Mr Smith said. “Wage growth, at 0.8% in the June quarter, remains modest and the labour market looks likely to deteriorate from here. At the same time, housing construction – one of the most interest rate sensitive components of the economy – is going backwards.”

Deloitte Access Economics expects data released tomorrow to show the pace of economic growth in Australia slowed further in the June quarter, and that the Australian economy went backwards on a per person basis over the past 12 months.

“Inflation is just one of the many complex structural issues facing the Australian economy that, as the Intergenerational Report highlighted last month, can only be solved by bold, productivity-enhancing fiscal policy and economic reforms,” he said.

CreditorWatch Chief Economist Anneke Thompson says after months of leading indicators pointing to a slower jobs market, the unemployment rate increased from 3.5% to 3.7% in July 2023. “This represents an additional 35,600 unemployed people, and is almost 65% of the annual increase in unemployment over the year to July. Coupled with a fairly moderate increase in the Wage Price Index (WPI) of 3.6% over the year to June, as well as declining job ads, the RBA can now be reasonably confident that the threat of the dreaded price-wage spiral has diminished considerably,” Ms Thompson said.

“Retail trade data also tells us that Australian consumers have slowed their spending – where they can – considerably. Certain areas of non-discretionary services, such as rents, insurance, utilities and education, continue to record high or rising price increases. However, the RBA is very likely to recognise that further increases to the cash rate will do little to stem these prices, as various exogenous impacts are responsible for price rises in these sectors.”

The impact of higher interest rates on Australian businesses is being felt mostly by businesses who rely on discretionary spending. “This means that according to Creditorwatch’s July 2023 Business Risk Index (BRI) data, 48% of food and beverage businesses and 35% of retail trade businesses are considered high risk. This puts these two sectors in the top three for high risk industries – the other industry being administrative and support services, where 29% are considered high risk. Quite incredibly, only 13% of food and beverage businesses are currently considered low risk, highlighting just how tough,” Ms Thompson said.

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