Commentary on Reserve Bank Board Interest Rate Decision - 3 October
Written by Admin
Date 03 October 2023
One governor leaves, another steps in, no change.
In her first monetary policy meeting as governor, Michele Bullock kept interest rates unchanged at 4.10 percent. Interest rates are now on a knife edge with the RBA waiting on decisive data before choosing to go up or down. As the economy continues to slow, it is more likely that the next move will be down, However, this will likely not happen until next year.
What the RBA said
“Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly and fuel prices have risen noticeably of late.”
“Growth in the Australian economy was a little stronger than expected over the first half of the year.“
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
Statement by Michele Bullock, Governor: Monetary Policy Decision, 3 October 2023.
The RBA is keenly waiting for the release of the Q3 CPI figures on 25 October. In the meantime, the monthly CPI indicator for August showed a slight increase from 4.9 percent in July to 5.2 percent in August on an annual basis. The main driver was an increase in automotive fuel which increased 13.9 percent. This was after decreases of -7.6 and -10.6 percent in previous months. This can be seen in the chart below.
Automotive fuel is of course volatile and when we look at the RBA’s preferred measure, the trimmed mean, we see that inflation was flat for the month at 5.6 percent.
While OPEC has pushed the price of oil up with production cuts, the higher prices will likely attract non-OPEC producers and will also tempt OPEC producers to increase production going forward. Thus, oil prices will not likely stay elevated for a long period so its impact on inflation should not be too concerning.
Households continue to slow down
Retail turnover was relatively flat in August with a meagre 0.2 percent increase. All categories were either negative or had smaller increases compared to the previous month. The exception was “other retailing” (see chart below).
Household wealth was up in the June quarter because of an increase in property prices. However, this “paper wealth” was not enough to see consumers draw down on their “transferable deposits'” by $ 8bn in the quarter. This helped to decrease overall deposits by $6bn. This was the first decrease since the GFC and shows consumers are increasingly feeling the pinch.
This increasing financial pressure on consumers can also be seen in the growing number of people with second jobs (see chart below). In the 25 years before COVID, the percentage of people with more than one job stayed between 5 and 6 percent. It has now been above 6.3 percent for the last seven quarters.
Demand for credit slowing
The demand for credit for the June quarter was the weakest since the June quarter 2005. While household demand for credit increased, credit demand by private non-financial businesses was at its weakest since COVID (see chart below). This is another sign that the economy is slowing which will keep the RBA away from a further rate hike.
Impact on the Australian Private Debt Market
The economy continues to slow down gradually which is good news for private debt investors. Of course, the impact of developments in the Chinese property market need to be monitored.
The decrease in private non-financial credit demand in the June quarters is a sign that there may be less opportunities in the near term so investors thinking about benefiting from the high floating rates of private debt may find increased competition in the near term.