Two major retail peak bodies have teared into the Reserve Bank of Australia’s (RBA) decision to lift interest rates to 4.35 per cent.

Both the National Retail Association (NRA) and the Australian Retailers Association (ARA) are calling it a significant blow for the retail industry as it heads into Black Friday, Cyber Monday and Christmas sales.

National Retail Association director Rob Godwin said retailers are reeling from yesterday’s decision.

“Business owners have been betting on an unrestricted Christmas trading period to ensure the future of their ventures as they battle rising insurance, supply chain, labour and rental costs,” Godwin said.

“Presumably, the Reserve Bank increased interest rates to put a spike in the 0.9 per cent month-on-month sales increase in September, as revealed by the Australian Bureau of Statistics (ABS) last month.

“However, according to the ABS, retail sales volumes are down 1.7 per cent compared to the September quarter last year, proving the 12 previous consecutive rate hikes have been more than effective at curbing consumer spending.

“It begs the question: does the RBA see stunting retail growth as the only solution to easing high inflation even though consumer spending isn’t a key contributing factor?

“Taking money out of the pockets of business owners every time retailers experience a small win isn’t a fair solution to the rising cost of living.

“Retailers are banking on the small sales wins through the year so they can adequately prepare for the Christmas sales period.”

According to the NRA, consumer sentiment has risen slightly after the RBA held rates for four consecutive months, but noted customers will be forced to pull back on their spending.

“The productivity of our sector depends on positive consumer sentiment and so does the business confidence of our retailers,” he said.

“The National Retail Association urges the RBA to hold interest rates in December or risk being branded the Grinch who stole Christmas by retailers and consumers alike.”

Meanwhile, ARA CEO Paul Zahra said the decision dampened retailers’ “cautious optimism” heading into Christmas.

“This rate increase will have a significant impact on discretionary spending, at a time where many retailers are struggling to remain sustainable due to the rising cost of doing business.

“Christmas and the holiday season are when discretionary retailers make up to two-thirds of their profits to sustain them during the winter months and hence, they will be devastated by today’s decision.”

Zahra said the retail industry – particularly small business – is still reeling after 12 interest rate hikes between May 2022 and June 2023. 

“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,” Zahra said.   

Last month, the ARA and Roy Morgan predicted shoppers will spend $66.8 billion between the start of November and Christmas Eve - virtually the same as in 2023. According to the ARA, this projected spend will be impacted by the RBA hike.

“In context, having the same level of Christmas spending as last year is concerning, particularly given we’ve seen the population grow by more than one million over the past year with more migrants returning as well as international students and inbound tourism along with price increases by unavoidable supply chain cost increases, particularly in food.

“Today’s decision will make the next two months a very nervous period for retailers.”

Inside the RBA decision

Stubborn inflation, a tight labour market and the state of the global economy are key reasons why the RBA lifted the cash rate by a quarter of a percentage point in November.

RBA governor Michele Bullock said in a statement that inflation in Australia has passed its peak, but is still too high and proving more persistent.

She said while goods price inflation has eased further, the prices of many services are continuing to rise briskly.

“While the central forecast is for CPI [consumer price index] inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.

“The [RBA] board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

Over the last four months when the cash rate was held, the board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts.

Bullock said the weight of this information suggests that the risk of inflation remaining higher for longer has increased.

“While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.

“At the same time,” Bullock continued, “high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. This is a more moderate increase than previously forecast.

“Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.”

Bullock reiterated that returning inflation to a 2 to 3 per cent target within a reasonable timeframe is the board’s top 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.

“If high inflation were to become entrenched in people’s expectations, it would be much more 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.”

Bullock also cited significant uncertainties ahead, including services price inflation which has been “surprisingly persistent” overseas, which could also occur in Australia.

“There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight,” Bullock said.

“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 remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.”

Depending on the data and evolving assessment of risks, a further tightening of monetary policy may be on the cards ahead.

Bullock said the board will continue to pay close attention to developments in the global economy, trends in domestic demand and the outlook for inflation and the labour market.

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