The Reserve Bank of Australia RBA board has delivered a third consecutive interest rate pause in September, leaving it unchanged at 4.10 per cent.
It comes as retailers prepare for peak trading in the lead-up to Christmas.
Outgoing RBA governor Philip Lowe said in a statement that interest rates have increased by 4 percentage points since May last year, noting this has established a more sustainable balance between supply and demand in the Australian economy.
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month,” Lowe said. “This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
Lowe confirmed that inflation in Australia has passed its peak and the monthly consumer price index (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.”
Australian Bureau of Statistics (ABS) data showed monthly CPI rose 4.9% in the year to July, down from 5.4% the previous month and under market forecasts of 5.2%.
In response, the Australian Retailers Association (ARA) CEO Paul Zahra welcomed the reprieve, saying it will give retailers “cautious optimism” heading into Christmas.
“The decision to hold interest rates for a third consecutive month will certainly bring relief to Australians, businesses and the retail industry,” 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.”
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,” he 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.
Zahra said the latest retail trade data is a bellwether of the discretionary spending slowdown.
Late last month, ABS reported that year-on-year (YoY) fashion and department store sales dipped by 0.3 per cent and 0.05 per cent respectively in July, showing a trending down of sales across both sectors.
Trend estimates indicate that both industries’ sales have trended down since late 2022, with both hitting peak sales in November 2022. Clothing, footwear and personal accessories’ hit $3.1 billion in November while department stores nudged past $2 billion in monthly sales.
National Retail Association CEO Greg Griffith said consumer confidence is a key factor that drives November and December trade.
“Three consecutive months without a rate rise will give consumers some extra breathing space, and hope that monetary policy may be eased in the new year,” Griffith said.
“This in turn should flow through to retail businesses and the pockets of their employees at a crucial time of the business calendar.
Speaking further on the rate rise decision, Lowe said the Australian economy is experiencing a period of below-trend growth, which 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,” Lowe said. “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 four-and-a-half per cent 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.”
Lowe said returning inflation to target with a “reasonable timeframe” is a priority for the RBA board. He said 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,” he said. “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, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”
However, Lowe said recent data shows inflation returning to the 2-3 per cent target range over the forecast horizon and with output and employment continuing to grow.
He said inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, despite a slowing of growth.
Lowe cited significant uncertainties ahead, noting services price inflation being persistent overseas which could occur in Australia.
“There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight.
“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.
“And globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”
Due to this uncertainty, Lowe said some further tightening of monetary policy may be required ahead.
This cash rate decision marks the final one handed down under Lowe.
Griffith acknowledged the last 12 months would have been difficult for the RBA board in its war against high inflation.
“For the majority of his tenure, however, Dr Lowe has presided over a period of low and stable interest rates, which created high levels of confidence in the Australian economy,” Griffith said.
“We look forward to this approach continuing under new Governor Michele Bullock, and wish her every success in the role.”