RBA says rate rise could be on cards as governor says she’s not expecting a recession in Australia

by Admin
June 18, 2024

The Reserve Bank has kept interest rates on hold at 4.35 per cent.

The cash rate target has been steady for seven months now.

Interest rates will remain at this level for another six weeks at least, until the RBA Board’s next meeting in early August.

The majority of market economists surveyed ahead of Tuesday’s decision expected the RBA to keep rates on hold, so it hasn’t surprised anyone.

It comes after recent data showed the trend unemployment rate ticked up in May, from 3.9 per cent to 4.0 per cent, which is its highest level in two years.

Economists said the slight increase in unemployment in May tracked the RBA’s forecasts well, and monetary policy appeared to be having the intended dampening impact on Australia’s economy.

The outlook remains uncertain

In a statement accompanying Tuesday’s decision, the RBA Board indicated that unemployment will have to rise further to make sure inflation definitely comes down.

“Broader data indicate continuing excess demand in the economy, coupled with elevated domestic cost pressures, for both labour and non-labour inputs,” the Board said.

“Conditions in the labour market eased further over the past month but remain tighter than is consistent with sustained full employment and inflation at target.

“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” it said.

It said the pace of the decline in the inflation rate had also slowed recently.

“Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” the Board said.

“But the pace of decline has slowed in the most recent data, with inflation still some way above the midpoint of the 2–3 per cent target range.

“Over the year to April, the monthly consumer price index (CPI) indicator 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.

“The Board expects that it will be some time yet before inflation is sustainably in the target range,” it said.

RBA governor warns the narrow path is ‘getting a bit narrower,’ but doesn’t expect a recession

The RBA board said the path of interest rates that would ensure inflation returns to target in a reasonable timeframe remained uncertain and further rate hikes could be on the cards.

“The board is not ruling anything in or out,” it said.

In a press conference following the RBA board meeting, Governor Michele Bullock stressed that things were delicately poised at the moment.

“We’re at a really complex part of the cycle at the moment,” she said.

RBA governor Michele Bullock says the slowdown in global growth has likely troughed.(ABC News: John Gunn)

“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.

“So really, we need to get more comprehensive readings on inflation before we can get a handle on the momentum in services inflation.

“We still think we’re on the narrow path, [but] it does appear to be getting a bit narrower,” she said.

Governor Bullock said the consumer price inflation for the June quarter will be really important because that will provide a comprehensive view of what’s happening with inflation.

But that June quarter data won’t be available until July 31, which is six weeks away.

“The challenge for us, which is almost unique to us, New Zealand’s the only other advanced economy I can think of, [where] we only have quarterly CPI [that is comprehensive], so it’s very difficult to get a read on momentum,” she said.

Ms Bullock said the board did not discuss the possibility of an interest rate cut, and it did consider the possibility that inflation risks were increasing.

But when asked about the current slowdown in global growth, she said she wasn’t expecting a recession in Australia.

“I would say that that’s not what we’re going to see,” she said.

“Interestingly, we think the world economy [has] probably troughed. We think that it won’t actually go down further.

“[But] there are some risks on the downside, so we’ve got to be really alert to them. If they look like they’re materialising then that’s when we have to think about whether or not we might have to do something with monetary policy,” she said.

RBA was correct not to hike

In recent months, some economists had suggested that the RBA should lift rates at this week’s meeting.

But on Tuesday, others said the RBA’s decision to keep rates steady was the correct one.

“With house prices continuing to climb and interest rates remaining high, cost of living pressures can be expected to continue for renters and mortgage holders,” said BDO economics partner Anders Magnusson.

“Meanwhile, asset rich individuals are receiving high returns from savings accounts and equity gains on their property.

“This classic imbalance of burden from monetary policy would only get worse if the RBA chose to hike interest rates further,” he said.

Citi economists Faraz Syed and Josh Williamson said the June quarter inflation figures would be crucial for the RBA Board’s next monetary policy meeting in August.

“In our view, financial markets are under-pricing the likelihood of a rate hike this year, especially in August if Q2 inflation surprises on the upside,” they said.

“That said, our core view remains that the board is unlikely to change the cash rate this year, with the first rate cut not expected until 2025.

“In an absolute sense, the RBA is a dovish central bank, reluctant to hike despite sticky inflation and a tight labour market.

“But relative to its peers, the RBA will be hawkish if it continues to keep policy rates unchanged while global central banks embark on an easing cycle,” they said.

Posted 19 hours agoTue 18 Jun 2024 at 4:34am, updated 15 hours agoTue 18 Jun 2024 at 8:41am