RBA Keeps Cash Rate Unchanged Amidst Slowing Economy and High Inflation

June 2, 2023

The RBA decided to keep the cash rate unchanged for the first time since April 2022. I agree with its read on the economy. Economic growth is slowing but still decent. Inflation has peaked but remains too high. Despite the better data over recent weeks the outlook is for a weaker global economy over the next year. Global inflation has not declined as quickly as expected. The recent financial market instability is likely to lead to some weakening of the global economy. 

After the March meeting, the RBA nominated four pieces of data that would help it determine whether there should be another rate hike in April. One was the labour market numbers that had shown a (modest) rise in the unemployment rate in December-January. The February jobs number was undeniably strong. The RBA though expected a sharp bounce back in jobs growth (for technical reasons associated with changing seasonal patterns influencing the economy). 

The second bit of data was business surveys. They indicated that in February firms thought that conditions remained solid, with order books growing at an above-average clip. Firms reported that while price growth was slowing it remained high. That message of slowing but still high inflation was confirmed in the February CPI (the third piece of data). 

The fourth was the retail sales figures that indicated that spending rose only modestly in February. Given the backdrop of high inflation much of that rise in spending almost certainly was a result of higher prices (implying a decline in volumes). A slowing of spending on goods has been expected as consumers switch more of their spending towards services post lockdowns. But growth in spending at restaurants also appears to be weakening. This suggests that rising cost of living and increasing interest rates is taking a toll on households. 

On balance, those numbers might have argued for another quarter percentage point rate hike in April. This is particularly the case given that Australia’s cash rate is currently comfortably below that of comparable countries (such as the US, UK, New Zealand and Canada). 

Interest rates in this cycle both domestically and globally have risen at their most aggressive pace since the early 1990s. The aggressive rate hikes followed a decade of low (and declining) rates. This sudden change in the direction of interest rates was always going to have some impact. Most recently it was the turmoil in financial markets from issues surrounding banks in the US and Europe. Last year it was problems in the UK bond market (exacerbated by a controversial budget). To date there have been few problems in the domestic economy or financial market. But we are 6 -12 months away from understanding what the full impact of the rise of interest rates to date will have on the domestic economy.