Australia’s central bank chief ruled out any imminent rate cuts, emphasising the need for restrictive monetary policy to tackle persistent core inflation.
Following a policy meeting, Reserve Bank of Australia (RBA) Governor Michele Bullock revealed that the bank’s board had considered a rate hike but concluded that the current policy stance was suitable. Bullock underscored that market expectations for rate cuts as early as November were premature, indicating that an easing of rates is unlikely for at least the next six months.
The RBA has maintained its key interest rate at 4.35% during the August meeting, amid heightened market anticipation and scrutiny.
In conjunction with the rate decision, the RBA published updated quarterly forecasts, suggesting a longer period of elevated inflation. The central bank now projects its preferred trimmed mean measure of inflation to end 2024 at 3.5%, slightly up from the 3.4% predicted in May, with a return to the target range expected by the end of 2025.
The unemployment rate is forecast to peak at 4.4% in June 2025, 0.1 percentage points higher than previously anticipated, and remain at that level until at least December 2026.
Economic growth expectations have been adjusted downward, with the RBA now anticipating GDP growth of 0.9% in June 2024, compared to the 1.2% forecast in May.
The RBA’s decision follows a better-than-expected inflation result for the June quarter. Despite this, the central bank has maintained its stance, with the latest forecasts indicating a slower return to the inflation target than previously expected.
“Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range,” the Reserve Bank board stated.
Beau Bertoli, co-founder and chief revenue officer at Prospa, commented on the broader economic sentiment: “While short-term small business confidence saw a modest uptick in June, long-term confidence continues to decline. Two in five (41%) of small businesses say they are confident about their business over the next 12 months and this falls to 32% when thinking about the next five years. Only 29% are confident about the future of their business in the next 10 years.”
“While some businesses, particularly those with high turnover, are managing to find growth opportunities, the overall environment of rising costs, subdued consumer demand and economic uncertainty continues to weigh on small business confidence and sentiment. This data underscores the need for targeted support and policy measures that boost the resilience and sustainability of small businesses, particularly in the most affected industries.”
“High inflation and interest rates have strained household budgets and weakened consumer spending, while operating expenses continued to erode profit margins. This impact is being felt disproportionately among small businesses depending on size and turnover. Almost half (47%) of small businesses with a $2M+ turnover expect their revenue to increase in the next 12 months, compared to 30% of small businesses with less than $100k in turnover. Interestingly, businesses with $2M+ revenue are most likely to increase their amount of debt owed, with 37% indicating intent to do so. On the other hand, small businesses with less than $100k in turnover are avoiding debt, with two in three reporting no current debt and no plans to borrow in the next 12 months. This cautious approach could reflect their limited access to credit or unwillingness to take on debt in an uncertain economic environment.”
“Two in three small businesses reported experiencing elevated levels of stress and burnout, with cost-of-living challenges and lack of consistent cash flow cited as the most common causes. Certain industries, particularly hospitality and construction, are bearing the brunt of these stressors. Over a third of small businesses in construction (36%) and hospitality (35%) report that they are experiencing extreme levels of stress and burnout.”
“Australia’s hospitality sector has seen a 41% increase in insolvencies as reported by Equifax, reflecting the severe financial pressures and low discretionary spending affecting these businesses. Small businesses are more likely to work extended hours, sacrificing personal and family time to keep their businesses afloat. The data highlights the need for targeted support measures, including education on alternative funding options and mental health support, to build small business resilience.”
Anneke Thompson, Chief Economist, CreditorWatch said: “The RBA today took the decision to leave the cash rate at 4.35 per cent, following last week’s reasonably positive June quarter CPI release. While the overall CPI figure increased by 3.8 per cent over the June quarter, up from 3.6 per cent over the March quarter, the trimmed mean measure of inflation, which removes volatile items, actually fell slightly between the March and June quarters.
“This RBA board will be reasonably comfortable that the cash rate at 4.35 per cent is having the required effect of cooling demand. Demand has certainly cooled significantly in areas of discretionary retail and the café and restaurant sector. Retail trade quarterly volume data showed that the volume of retail goods sold per capita has fallen every quarter for eight quarters in a row.
“This means that any increase in retail trade spend is driven mostly by price increases and population growth. It appears that the RBA will be comfortable with inflation falling at a slower pace, and is no doubt aware that its current settings are hurting certain businesses and households far more than others. It is also possible that an increase to the cash rate actually fuels demand, given that the large ‘baby boomer’ cohort of the population tends to have little to no debt and cash in the bank attracting higher interest earnings.
“Looking forward, in all likelihood, the RBA will begin to cut the cash rate before inflation gets back within the target band. This is because of the known lag effect of tightening monetary policy, and it will be very keen to not undo the remarkable gains in employment and the labour force over the last few years.
“CreditorWatch’s June Business Risk Index (BRI) data also points to significant cooling in business activity, with the average value of invoices held by businesses having fallen 49.9 per cent over the year to June 2024. Holding the cash rate at this peak for too long risks causing further, unnecessary pain on many small businesses, particularly in the construction, retail and hospitality sectors.”
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