Dr Lowe signed off with another pause in interest rates - no final pull on the interest rate lever!

With a slowing but resilient economy, the RBA is comfortable to stay on the sidelines and observe. It did however join the international chorus of concern over the Chinese economy and its potential impact on global growth.  

What the RBA said

“Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline. But inflation is still too high and will remain so for some time yet.”

“Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed.”

“And globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”

Statement by Philip Lowe, Governor: Monetary Policy Decision, 5 September 2023.

https://www.rba.gov.au/media-releases/2023/mr-23-23.html

What to expect next

Inflation continues to fall

Inflation continues to tumble down. The monthly inflation indicator fell again in July to 4.9 percent, down from 5.4 percent in June (see chart below). Nearly all categories saw inflation fall in July with fruit and vegetable prices actually decreasing -5.4 percent.

Households continue to slow down

The mortgage and rental squeeze continues to apply brakes to consumer spending. Household spending decreased -0.7 percent in July on an annual basis. This is the first decrease since February 2021. Discretionary spending decreased by -3.3 percent.

Spending on goods fell -4.1 percent on an annual basis while more importantly spending on services decreased from 5 percent in June to 2.4 percent in July on an annual basis. Hopefully this fall in services spending will flow through to the services component of CPI, which has been more sticky than goods inflation in the last year.

The slowdown in spending can also be seen in housing loans, with new housing loan commitments falling -1.2 percent in July on a monthly basis and -14.1 percent on an annual basis.

Encouragingly for the RBA, the Wage Price Index also turned a corner in the June quarter, falling slightly from 3.7 percent in the March quarter to 3.6 percent in the June quarter (see chart below). If the WPI continues to fall this will alleviate the need for further interest rate rises.

Company profits down

Companies are also starting to feel the pinch with a -2 percent decrease in inventories in the June quarter and a -11.8 percent decrease in gross profits on an annual basis (see chart below). This was the first decrease since June 2016.

Export prices are also taking a hit. Good exports fell 7 percent in the June quarter, the largest fall since June quarter 2014, as prices for energy commodities like coal and LNG continue to fall from their 2022 highs.

The RBA will be watching exports and companies closely going forward and will be hoping that the decreases remain moderate.

Impact of the rate increase on the Australian Private Debt Market

Much like last month, a slowing economy means Private Debt fund managers and investors should remain vigilant but not worried. Another pause in interest rates and slowing consumer spending suggests we are another step closer to a soft landing.