The Reserve Bank of Australia (RBA) has stayed the cash rate at 4.1 per cent as retailers brace for ongoing cost pressures.
Interest rates have increased by 4 percentage points since May last year.
RBA governor Philip Lowe said the higher rates are working to establish a sustainable balance between supply and demand in the economy, leading to the rate pause decision.
He said this will provide further time to assess the impact of the cash rate increases to date and the economic outlook.
Meanwhile, inflation is declining in Australia, but Lowe said 6 per cent is still too high.
“Goods price inflation has eased, but the prices of many services are rising briskly,” Lowe said. “Rent inflation is also elevated.
“The central forecast is for CPI inflation to continue to decline, to be around 3¼ per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025.
Lowe said the Australian economy is experiencing a period of below-trend growth, adding this is expected to continue for a while.
“Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1¾ per cent over 2024 and a little above 2 per cent over the following year.”
Both the Australian Retailers Association (ARA) and the National Retailers Association (NRA) have welcomed the cash rate pause but said businesses are currently struggling.
ARA CEO Paul Zahra said the retail industry – particularly small business – is still reeling after 12 interest rate hikes since May 2022.
“There is a lag effect around cost-of-living pressures in retail, and the full impact of interest rate rises are yet to be felt, with many hundreds of thousands of mortgage-holders still tipped to roll off fixed rate loans this year,” Zahra said.
“Similarly for retailers, we expect many significant leasing cost increases and other cost of doing business impacts are still yet to come.
Zahra pointed to the latest retail trade data as a bellwether of the discretionary spending slowdown.
“For the first time this year, department stores, clothing, footwear and accessories and other retailing joined household goods in the realm of a year-on-year spending decline,” he said.
The ABS last week revealed the annual rate of headline inflation fell to 6 per cent in June. The annual inflation rate was at 7.8 per cent in the December quarter.
NRA CEO Greg Griffith said businesses are buckling under the weight of cost pressures such as the 5.75 per cent payroll increase on July 1 as consumers tighten their wallets.
He said it was vital the Federal Government consider retailers under pressure when making decisions that could adversely affect the sector, particularly around casual employment laws.
“While the Reserve Bank’s rate hikes have had their intended effect on spending, small retailers are on the brink of closing down with this pause in cash flow,’’ Griffith said.
“The Governor’s careful consideration of the resilience of the Australian economy is to be commended. We hope the RBA will continue to stay its hand so the retail sector can keep its head above water.”
Further RBA economic analysis
Lowe said conditions in the labour market remain very tight despite easing a little. Australian Bureau of Statistics (ABS) data revealed that the employment rate remained at 3.5 per cent in June.
“Job vacancies and advertisements are still at very high levels, although firms report that labour shortages have lessened,” Lowe said. “With the economy and employment forecast to grow below trend, the unemployment rate is expected to rise gradually from its current rate of 3.5 per cent to around 4.5 per cent late next year.
“Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.”
Lowe said returning inflation to target within a “reasonable” timeframe is the RBA board’s key priority.
“High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
To date, Lowe said medium-term inflation expectations have been consistent with the inflation target, noting it is important this remains the case.
“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. There are, though, significant uncertainties.
“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.
“The outlook for household consumption is also an ongoing source of uncertainty. Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.
“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.”
According to Lowe, some further tightening of monetary policy may be required to ensure that inflation returns to target, “but that will depend upon the data and the evolving assessment of risks.”
“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”