Governor Michele Bullock left the cash rate unchanged on Tuesday.

In December, the RBA had been reluctant to act without more information. By the meeting in February, they had received more information and there were no major surprises.

Goods inflation continues to trend down nicely but services inflation remains a little stickier. There is still some excess demand to be squeezed out of the economy to help bring inflation down further but at this stage the RBA wants to maintain its light touch.      

What the RBA said

“While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks.“

“Goods price inflation was lower than the RBA’s November forecasts. …  Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high.”

“Domestically, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight. The outlook for household consumption also remains uncertain.”

Statement by Michele Bullock, Governor: Monetary Policy Decision, 6 February 2024.

https://www.rba.gov.au/media-releases/2024/mr-24-01.html

What to expect next

Inflation keeps trending down

Inflation decreased from 5.4% in Q3 to 4.1% in Q4 on an annual basis. Both goods and services inflation have peaked and are trending down but services inflation is coming down more slowly and is now higher than goods inflation (see chart below).

Sticky services

Goods inflation has been falling faster because many of the supply bottlenecks from the pandemic have been resolved. Further, the increase in costs over the year has seen consumers cut back on goods while spending on services has increased (see chart below).

Given the size of Australia’s service sector (around 80% of production), rising wages has also had a bigger impact on the cost of services. Then there is the impact of rising rents and mortgage interest payment on service inflation.

A slowing economy will help bring services inflation down

As the economy continues to slow, this will take the steam out of the labour market and wages. There are already signs of labour market softening. The number of workers fell by 65,000 in December, which was the largest fall since the pandemic. Further, December saw the number of hours worked continue to fall from its recent peak (see chart below).

Mortgage interest payments will naturally decrease as interest rates are cut.

What happens with rents are less certain. The latest data from core logic shows a small decrease in average rents (see chart below) but with rental vacancies historically low, large numbers of immigrants, and no significant increases in future supply upcoming, rents will remain under pressure over the next year.

2022-23 set a record for net overseas migration with over 500,000 people added to the population. However, this has brought the government under pressure and they are looking to halve the intake over the next two years to bring it in line with pre-pandemic levels. This will help decrease the excess demand in the rental market.   

Impact on the Australian Private Debt Market

The Australian economy is still set for a soft landing. Services inflation remains sticky but the RBA is feeling confident enough to let the slowing economy slowly bring it down. Private debt investors can continue to enjoy high floating rates with a solid economic backdrop.