The cash rate was left unchanged on Tuesday.

RBA Governor Michele Bullock channelled Paul Atreidies at her press conference in talking about “keeping on the narrow path” to a soft landing. However, in terms of interest rate cuts, we are on a knife’s edge: the RBA believes risks are finely balanced and that it could move rates either way depending on future data. This is a noticeable change from February when the RBA’s Statement said it “didn’t rule out future rate rises” and the subsequent Board Minutes revealed that the Board had considered raising rates in February.

However, given the increasing pressure on consumers, the RBA’s next interest rate move will likely be down, so long as wage growth moderates as the RBA predicts (or productivity increases) and services inflation decreases. If they don’t then the RBA will find itself between a rock and a hard place when it comes to its price stability and full employment mandate.         

What the RBA’s Statement said

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”

“Wages growth picked up a little further in the December quarter, but appears to have peaked with indications it will moderate over the year ahead.”

“Household consumption growth remains particularly weak amid high inflation and the rise in interest rates.”

“... measured productivity growth has picked up in the past two quarters but whether this trend will be sustained is uncertain.”

Statement by Michele Bullock, Governor: Monetary Policy Decision, 19 March 2024.

https://www.rba.gov.au/media-releases/2024/mr-24-05.html

What the Governor said at the press conference

“What we need is greater confidence that inflation will return to the target band in a reasonable time frame and stay there.”

“There has been little new information on services inflation where the recent pressures have been.”

“The war isn’t yet won.”

“I still firmly believe we are on the narrow path.”

What to expect next

RBA believes high wage growth will slow

Monthly CPI was flat at 3.4% but the increase in the Wage Price Index to 4.2% on an annual basis for Q4 caught everyone’s attention - it was the highest level since 2009 (see the chart below). The line showing the increase on an annual basis just seems to be going up and up!

However, in its Monetary Policy Statement and in Bullock’s press conference, the RBA is adamant that wage growth has now peaked and is on its way down. In addition to their modelling, they can see that the labour market continues to soften: unemployment has slowly started moving up, increasing from 3.9% in December to 4.1% in January (seasonally adjusted). Further, the number of hours worked has also started moving down (see chart below). The RBA is also hearing anecdotes from its business liaison that finding employees has become much easier.

The economy is slowing

And why is the labour market softening? A big reason is that the economy is slowing. While Q4 GDP didn’t fall as far as some commentators predicted, it only grew 0.2% on a monthly basis and continues its gradual decline that started in December 2022 (see the bars in the chart below).

Further, in terms of contributions to GDP, the Q4 result was only positive because of net trade (see chart below). The contribution of private demand has been muted since 2021. With the price of iron ore tanking at the moment, net trade may not be enough to keep GDP positive in Q1 2024.

Consumers are doing it tough

According to research by Roy Morgan, a record high of 1.6 million mortgage holders are now “At risk” or “Extremely at risk”, which is around double the amount when the RBA started lifting interest rates.

Retail turnover and monthly household spending were both slightly up in January on a monthly basis but the wider trend is still clearly downwards from mid to late 2022. This can be most clearly seen with retail turnover (see chart below).

Consumer sentiment increased slightly from 81 points in January to 86 in February. However, unsurprisingly, consumer sentiment remains in pessimistic territory and is hanging around pandemic and 2008-09 GFC levels (see chart below). Only during the1983 and 1991 recessions was it lower.

Impact on the Australian Private Debt Market

The Australian economy is slowing but remains resilient. The RBA has signalled that a rate cut is now a possibility and will likely step in if the economy deteriorates. Remember, it was only the pandemic that ended Australia’s golden run of uninterrupted economic growth following the 1991 recession. Private debt investors can continue to enjoy the current high floating rates and when the rate cut does come, it will bring the benefit of putting a floor under economic growth.