Australian mortgage holders have let out a nationwide sigh upon the Reserve Bank’s announcement that interest rates will be staying put for the time being, at a 12-year high of 4.35 per cent.
The RBA met on Tuesday for the first time since March, noting that while inflation continues to moderate, it is declining more slowly than expected.
It has warned the economic outlook is uncertain and recent data has demonstrated that the process of returning inflation to the target range is unlikely to be smooth.
“The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks,” the bank’s statement read.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the Board is not ruling anything in or out,” it said in a statement explaining its May decision.
“The Board will rely upon the data and the evolving assessment of risks. 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.”
Economist Stephen Koukoulas, who was previously an economics advisor to the Prime Minister’s Department, says Australia’s “miserable” retail sales will play a major role in the months ahead. He has called for the RBA to lower rates as soon as possible due to the “sluggish” economy.
Under the rampant surge in the cost of living, largely brought on by reckless policy throughout the Covid pandemic, regular Aussies are finding themselves with less and less in their pockets at the end of the month, even with inflation beginning to slow.
Grotesque supermarket prices and an overall rise in basic service costs have forced those who aren’t earning high wages to cut back on spending on the non-essentials that keep businesses pumping.
Tie that in with through-the-roof house prices, and you quickly begin to see an underclass of disenfranchised essential workers who are now resorting to charities in record numbers just to stay on the treadmill.
“To say that monetary policy needs to be tightened again is to be looking in the wrong direction. The economy is slowing and it’s a matter of time before inflation hits the target… with current policy settings,” Koukoulas told listeners as he weighed in on Tuesday’s decision.
‘On the cusp of genuine recession’
Koukoulas also reiterated his past warnings that we are likely headed for a recession if retail figures do not pick up.
Data shows per capita retail sales dropped 0.4 per cent in the March quarter, marking the sixth downturn over the last seven quarters.
“We’re on the cusp of not just a per capita recession, but a genuine recession,” he continued.
“The Reserve Bank needs to get on its bike and cut interest rates. The economy is exceedingly weak.
“It is being crushed under the weight of oppressive monetary policy. Consumers are responding to the fact their cash flows are being hammered by high interest rates and cost of living pressures.”
Meanwhile, UNSW Economics Professor Gigi Foster said the potential reasoning behind Tuesday’s RBA interest rate hold could lie in the upcoming tax cuts slated for July, which will give the average worker around $50 extra in their hand a week.
“The RBA doesn’t just look at the rate of inflation, remember, it’s also just looking at other signals, whether it’s the labour market, supply chains, or consumer confidence,” Professor Foster told Sky News host Chris Kenny.
“Those signals, a lot of them have been quite strong, don’t forget as well, that just around the corner is the modified stage three tax cuts. “That’s going to inject a bit more money into people’s pockets.
“I think Michele Bullock is hedging her bets and preparing the markets for a potential another bitter pill to swallow, you might say, particularly for mortgage holders.”
Other analysts have actually urged Australians to “force the nation into a DIY recession” by slicing “Netflix, flat-whites, movies and eating out” from their budgets.
Rand Low, an Associate Professor of Quantitative Finance at Bond University, said Aussies must ease their “discretionary spending” so that we can collectively drive the nation into a recession — one that he claims would be “short-lived”.
He said that if we don’t do this we will likely suffer from a “very severe recession” that may take many years to get out of.
“It’s true that if we eat out less, buy less ‘stuff’ it will impact the economy and drive it into a recession,” he said.
“But what we are looking for is that it may be necessary to have a slight recession for maybe a year or so, rather than a ‘deep’ recession that may last several years.”
He said this is because non-discretionary spending and inflation is likely rise up due to the cost of subsistence goods (i.e., petrol, food, energy, shelter) going up.
Meanwhile, the Commonwealth Bank says further rate rises are still a “near‑term risk”, with cuts likely to come slower than previously expected.
Most of the expected cuts will likely be pushed back to 2025, according to the bank’s head of Australian economics Gareth Aird.
He explained that strong population growth, driven by net overseas immigration, has put pressure on the Consumer Price Index.
“Most notably the housing‑related components,” Mr Aird wrote last week.
“As a result, demand is stronger and so inflation is falling less quickly than otherwise.”
The RBA estimates the cash rate will be 4.4 per cent by December, up from 3.9 per cent forecast at the beginning of the year.