Despite slower employment growth, the unemployment rate remained at 4.2% in August. CreditorWatch’s Ivan Colhoun analyses why the RBA opted to hold rates and what comes next for businesses
What’s happening: The Reserve Bank of Australia held the cash rate at 3.60% today, with the Monetary Policy Board citing signs that inflation in the September quarter may be higher than expected. The decision follows data showing private consumption is recovering more rapidly than forecast, whilst the unemployment rate remains steady at 4.2%.
Why this matters: CreditorWatch Chief Economist Ivan Colhoun says if third-quarter trimmed mean inflation prints at 0.8% or higher in late October, a pre-Christmas interest rate cut is unlikely barring a sharp jump in unemployment. The decision represents the RBA’s ongoing balancing act between controlling inflation and supporting employment.
The Reserve Bank of Australia’s Monetary Policy Board has unanimously voted to keep interest rates on hold at 3.60%, as stronger consumer spending and persistent inflation pressures combine to delay further easing.
According to CreditorWatch Chief Economist Ivan Colhoun, the decision was widely expected following indications of stronger consumer spending and higher inflation pressures in the August monthly Consumer Price Index.
“As expected, indications of stronger consumer spending and higher inflation pressures in the August monthly CPI combined to see the RBA Monetary Policy Board leave interest rates on hold today,” Colhoun says.
Inflation slowdown stalls
The RBA’s statement highlighted that the decline in underlying inflation has slowed, despite inflation having fallen substantially since the peak in 2022. Both headline and trimmed mean inflation were within the 2 to 3% range in the June quarter, but recent data suggest the September quarter may deliver a different picture.
“Recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy,” the RBA stated.
Colhoun notes that the first paragraph of the monetary policy statement is particularly telling. “The first para notes that inflation in the September quarter may be higher than expected at the time of the recent August forecasts, which in my view will be a constraint on the pace of further easing,” he says.
If the third-quarter trimmed mean CPI prints at 0.8% quarterly or higher in late October, Colhoun says a pre-Christmas interest rate cut is unlikely, barring a sharp jump in the unemployment rate, which is not suggested by leading indicators.
Consumer spending rebounds
Data for the June quarter show that private demand is recovering a little more rapidly than expected, according to the RBA, taking over from public demand as the driver of growth. Private consumption is picking up as real household incomes rise and measures of financial conditions ease.
The RBA noted that the housing market is strengthening, a sign that recent interest rate decreases are having an effect, and credit remains readily available to both households and businesses.
Colhoun remains cautious about the durability of the consumer spending pickup. “I remain to be convinced about the durability of the pick-up in consumer spending, assessing a range of one-off factors as having been important in recent months, including weather, the Lions Rugby tour and end-of-financial-year discounting,” he says.
Labour market conditions have been broadly steady in recent months and remain a little tight, according to the RBA. Growth in employment has slowed by slightly more than expected, but the unemployment rate was unchanged at 4.2% in August. Measures of labour underutilisation remain at low rates.
“The Bank acknowledged that employment growth had been slower than expected, but the unemployment rate has remained low at 4.2%,” Colhoun notes.
Business surveys and liaison suggest that availability of labour has been little changed of late. Looking through quarterly volatility, wages growth has eased from its peak, but productivity growth has been weak and growth in unit labour costs remains high.
The RBA’s focus on both inflation and employment represents an important shift. “The third para headlines the focus on the RBA’s dual mandates,” Colhoun says. “An important change occurred in July when that heading changed from the priority being to return inflation to target to the dual mandates of at target inflation and full employment.”
Christmas cut unlikely
With the RBA assessing spending is recovering a little more quickly than expected, inflation is not as low as it previously expected and the labour market remains a little tight, Colhoun says it would seem unlikely that the Board will act to reduce rates further in November.
“Continuing weaker employment growth or signs that the improvement in consumer spending is not as durable as the Bank assumes would seem like the most likely catalysts for a reassessment in that regard,” he says.
The vote today was unanimous, with all members of the new Monetary Policy Board supporting the decision to hold. Colhoun notes that the market is still learning about the new board’s dynamics.
“I did wonder whether any members might dissent on the grounds that employment growth has softened,” he says, noting that downside risks to employment growth were the reason for the US Federal Reserve’s recent rate cut.
The RBA’s statement emphasised that financial conditions have eased since the beginning of the year and this seems to be having some impact, but it will take some time to see the full effects of earlier cash rate reductions. The Board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve.
Earlier in the year, inflation tracking to forecast opened the door for RBA rate cuts, with core CPI meeting the RBA’s expectations and bringing the annual rate to 2.9%, squarely within the central bank’s 2 to 3% target band.
The RBA noted it remains alert to the heightened level of uncertainty about the outlook, particularly regarding international developments. Uncertainty in the global economy remains elevated, with ongoing concerns about US tariffs and policy responses in other countries, though more extreme outcomes are likely to be avoided.
“The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” the RBA stated. “In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.”
For consumers with mortgages and businesses, the lack of a further interest rate cut and the reduced probability of a move before Christmas will likely be disappointing, Colhoun acknowledges. However, he emphasises the positive aspect of the current situation.
“While no doubt disappointing for consumers with mortgages and businesses alike, it’s still very good news that the unemployment rate remains very low,” he says. “For the moment, while consumers with mortgages and businesses will likely be disappointed by the lack of a further interest rate cut and the reduced probability of a further move before Christmas, the RBA is appropriately balancing its mandate to return inflation to target, while keeping unemployment low.”
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