The Reserve Bank of Australia has continued to maintain its wait and see mantra, holding the official cash rate at 4.35 per cent for the fifth straight meeting.
Inflation has proven to become more of a problem than it was at the start of the year, however a strong labour market, and strong housing market, is keeping the RBA’s finger off the interest rate hike button.
It’s hard to truly analyse and forecast when the RBA is so data driven. We’re somewhat beholden to just wait and see, a mantra which the Reserve Bank has been happy to use since hiking rates in November last year.
Indeed the word uncertainty was used more times today than in any Board statement in the last six months.
We will try to unpack what the RBA and Governor Michele Bullock is saying about interest rates and inflation, as well as the opinions of experts and economists as to how they see the state of play in the Australian economy.
The RBA statement first addressed the pace of the inflation decline slowing, which has been well publicised over the last few months.
They noted that since the central forecasts published in May were for inflation to return to the target range of 2–3 per cent in the second half of 2025 and to the midpoint in 2026, there have been indications that momentum in economic activity is weak, including slow growth in GDP, a rise in the unemployment rate and slower-than-expected wages growth.
The statement said some central banks have eased policy, although they remain alert to the risk of persistent inflation. The conclusion of the statement returned to a little bit more doom and gloom that was more akin to Philip Lowe’s reign. For the first time since February the statement re-introduced the sentence “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
Bullock opens with a three-minute monologue generally before taking questions from journalists, first noting the change to inflation globally.
“Inflation’s come down a long way since it peaked in 2022 both in Australia and overseas,” Bullock said.
“Part of this was the resolution of supply chain issues and also the energy prices easing which has helped, but it also reflects the tightening of monetary policy all around the world and that’s helped to dampen demand. That said, inflation is still above central bank targets in many economies and is proving to be sticky, and the progress in getting inflation down has slowed, and Australia isn’t any different.”
Bullock noted that since the last meeting, which was in May, the March Quarter national accounts have been received which Bullock says showed “a few interesting things”.
First was consumption growth being stronger than the RBA had thought, and the savings rate a bit lower. At the same time, GDP barely grew in that quarter and consumption per capita had continued to decline.
“We expect household real incomes will rise later in the year with tax cuts and lower inflation, so it is possible that consumption growth will be a bit stronger. But we also know that many households are really feeling the impacts of high inflation and high interest rates.
“On average, households have reduced their saving rate by more than we thought to support their spending. It’s tough just to keep up with essentials.
Bullock said on the other hand, labour conditions are quite strong.
“The unemployment rate published last week was at four per cent for May. Employment is still growing, it’s just growing a bit more slowly than it was a year or so ago. This is important for the other part of our mandate, because people having jobs is critical to them being able to meet the challenges of the high cost of living.”
Bullock said the narrow path does appear to be getting narrower.
“The recent data have been mixed, but overall, they reinforce the need to remain vigilant to the upside risks to inflation. We still think we’re on the narrow path, it does appear to be getting a bit narrower. We need a lot to go our way if we’re going to bring inflation down to the two to three per cent target range.”
Monthly inflation has proved a bit of a hindrance to those wanting the cash rate to come down in a shorter time frame to what’s played out. The latest CPI indicator over the year to April rose by 3.6 per cent in headline terms, and by 4.1 per cent excluding volatile items and holiday travel, which was similar to its pace in December 2023.
Bullock said the monthly CPI for April was stronger than expected, however there’s been limited information about services inflation since the May board meeting, and this is where the most recent strength has been coming from.
“Really we need to get more comprehensive readings on inflation before we can get a handle on the momentum in services inflation,” Bullock said.
The next inflation release will be June 26 that will cover the May CPI. The next quarterly inflation data will come at the end of July and that is expected to be the key to what will happened to interest rates over the rest of 2024. They will also be released just a week before the RBA’s meeting in August.
Before the hold announcement at the June meeting, ANZ had changed their forecast of the first rate cut from November 2024 to February 2025.
“The stronger than expected Q1 CPI also makes it hard to see the RBA being sufficiently confident that inflation will return to and stay in the band by the time the November meeting comes around,” ANZ’s Head of Australian Economics Adam Boynton said.
“It’s not that monetary policy isn’t working. It is. The economy has clearly slowed, particularly across private final demand. It’s for this reason that we think a rate hike remains unlikely. However, getting an appropriate balance between the level of demand and supply is likely to take a little longer than expected given the three factors outlined above.”
Westpac Chief Economist Besa Dede said the RBA Board appears less certain that inflation is moderating as they’d like and there’s lingering concerns about persistent price pressures.
“Governor Bullock’s remarks, together with the changes to the accompanying Board statement, reveal the RBA has become more alert to upside inflation risks. Additionally, the Board appears less confident inflation is moving sustainably towards the inflation target within a reasonable timeframe.”
NAB and CBA are yet to comment on the rate hold.
Every expert and economist in Finder.com.au’s RBA Cash Rate Survey correctly predicted the cash rate would hold at the June meeting.
AMP Chief Economist Shane Oliver said there should be a cut before the end of 2024.
"Following recent higher than expected inflation data the RBA still lacks the confidence to start cutting rates and so will hold for the next few meetings, with the risks still being on the upside for rates. But weaker growth and lower inflation should allow a cut by year end."
Matthew Peter, Chief Economist for QIC, agreed a cut should occur this year.
"The economy is on the brink of recession. The unemployment rate is rising. Inflation is falling, even if gradually. The RBA will be in a position to ease in support of the economy later in the year, without unduly rekindling inflation."
Moody’s Analytics economist Harry Murphy Cruise said the outlook for Aussie inflation has gotten a little murkier of late.
“With inflation digging in its heels, the government is ramping up spending to bring it down faster. The government (and RBA) hopes the rebates will lower inflation, first by temporarily lowering the price in the CPI, and secondly by tempering inflation expectations.
“Treasury expects the rebates to shave 0.5 percentage point from the headline inflation rate in the year to 30 June, 2025. And it's probably not wrong.
“But the big question is what it does to underlying inflation – the Reserve Bank of Australia’s preferred measure of inflation, which strips out volatile items, often food and energy. These impacts are much less clear. It will all depend on how much of the energy rebates gets spent, and how much gets squirrelled away into savings. If they're spent, it would add to demand at the exact same time the RBA is trying to take it out, adding to underlying inflation even if the headline figure comes down.
Murphy Cruise said the board will be cautious not to pull the rate-cut trigger too early, with large amounts about to hit bank accounts from tax cuts and energy rebates.
“We see rates staying where they are until December, when a 25-basis point cut will take the cash rate to 4.1%."
Despite the fact the interest rate outlook has become more uncertain in the last few months, house prices seem to show no signs of slowing down.
PropTrack, realestate.com.au’s property data and analytics product, showed . The showed national home prices hit a new record in June, despite the higher interest rate environment.
Monthly growth however has slowed since the summer selling season in each capital city.
“Housing demand remains strong due to population growth, tight rental markets, resilient labour market conditions and home equity gains,” PropTrack Director of Economic Research Cameron Kusher noted, adding that they expect prices will lift further this year due to tax cuts on July 1 which will support real incomes and household spending.
“Building activity is at decade-low levels, exacerbated by a lack of new construction, which is creating a chronic shortage of housing. The imbalance between housing supply and demand has offset the higher interest rate environment and deterioration in affordability, fuelling home prices and rents.”
CoreLogic Research Director Tim Lawless says housing markets seem to be somewhat insulated from higher interest rates. CoreLogic’s Home Value Index continued to rise through June, and the combined capital's daily index was already 0.4% higher over the first 18 days of the month.
“The RBA made a point of calling out an increase in household wealth via higher housing prices which, together with a rise in disposable incomes, could support household spending,” Lawless said.
“Similarly, the volume of home sales is tracking higher than a year ago and above the five-year average, demonstrating consistently strong demand from purchasers despite an array of headwinds including high interest rates, cost of living pressures, low sentiment and stretched affordability.”
While ANZ pushed out their forecast to February next year, the other three of the big four banks are still sticking with November.
Westpac say their inflation forecasts for the upcoming June quarter report are below that of the RBA’s, leaving them “comfortable” with their view that the next move in the cash rate will be down and arrive in November. They did however acknowledge there’s a greater risk of rate relief slipping into next year.
ANZ believes, after a February rate cut, there will be a “follow-up easing shortly thereafter”, most likely in April, although May is too possible.
They are retaining three cuts in their forecasts, but see the final cut being delayed until the final quarter of 2025, a total of 75 basis points easing in total. While they see risks around the start of the easing cycle as balanced, risks around the scale of easing are skewed towards two cuts being more likely than four.
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