The Reserve Bank of Australia’s decision to hold the cash rates steady at 4.35 per cent yesterday has allowed retailers to wipe their brows with relief, but the two retail peak bodies in Australia are not yet fully relaxed.
The Australian Retailers Association CEO Paul Zahra said retailers were initially optimistic for a cash rate cut in mid-2024, but now this appears less likely.
“Another cash rate increase would be punishing for both mortgage holders and discretionary retailers, with small businesses on thin margins being the most vulnerable,” Zahra warned.
Despite this, Zahra said the cash rate pause this month should provide a hint of relief for retailers as economic challenges continue to dampen discretionary spending and consumer confidence.
“At a time of immense financial pressure and hardship for many Australians and retail businesses – avoiding another cash rate increase is critical to consumer confidence,” Zahra said.
“March’s retail performance remained subdued, with cost-of-living pressures taking their toll on discretionary spending categories.
“Higher interest rates are a major factor in this spending slowdown. Whilst we haven’t seen an increase since November, higher mortgage repayments are taking a toll on household budgets.”
Meanwhile National Retail Association director Rob Godwin said the pause gives the Federal Government a perfect opportunity to support retailers through in upcoming Budget, expected to be tabled on May 14.
“If the Federal Budget successfully addresses ballooning energy costs and insurance premiums while interest rates are held, it could prevent many businesses from exiting the market," Godwin said.
“The March trading period saw a 0.4 per cent drop in sales, and discretionary retailers who experienced a soft sugar hit in February from [Taylor Swift’s] Eras Tour experienced a proportionally worse sales decline the following month.
“55 per cent of Australian businesses expect a decline in year-on-year profits in the coming 12 months, as result of high interest rates, wage increases and weakening household consumption.
“The Australian retail business outlook is made all the grimmer with the Reserve Bank’s insistence on holding rate cuts off until 2025, risking current and potential investors.”
According to National Retail’s 2024 Retail Sentiment Report, 29 per cent of retailers have cut advertising costs, and reduced spending on customer acquisition and retention, which will have a knock-on effect for manufacturers and suppliers in Australia.
“Retailers need urgent Government support if they’re going to cope and evolve through these uncertain economic conditions,” Godwin said.
“The Reserve Bank’s decision thus far has created an uncertain environment for business owners, we hope the Federal Government will use this month’s Budget to restore some lost confidence.”
With May’s cash rate decision now in the books, the RBA will meet again mid-June.
According to a statement by the RBA, recent information indicated that inflation continues to moderate, but is declining more slowly than expected. The consumer price index (CPI) grew by 3.6 per cent over the year to the March quarter, down from 4.1 per cent over the year to December, and underlying inflation was higher than headline inflation and declined by less.
“This was due in large part to services inflation, which remains high and is moderating only gradually,” the RBA statement read.
“Higher interest rates have been working to bring aggregate demand and supply somewhat closer towards balance. But the data indicate continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs.
“Conditions in the labour market have eased over the past year, 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.
“Meanwhile, inflation is still weighing on people’s real incomes and output growth has been subdued, reflecting weak household consumption growth.”
According to the RBA, the outlook remains highly uncertain, with recent data showing that the process of returning inflation to the 2-3 per cent range is unlikely to be smooth.
Current forecasts show inflation returning to the target range in the second half of 2025, and to the mid-point by 2026.
“In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year. Inflation is, however, expected to decline over 2025 and 2026.
The path ahead for interest rates also remains uncertain, with the RBA board saying it is not ruling any measures in or out, including the possibility of another interest rate rise.
“The board will rely upon the data and the evolving assessment of risks,” RBA noted. “In doing so, it 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.
“The Board remains resolute in its determination to return inflation to target.”