Following this week’s shocking retail sales data, which saw annual retail sales growth collapse to only 1.3% and per capita sales collapse, I argued that Australia’s interest rate hawks had been shot down.
Source: Shane Oliver (AMP)
Australia’s most vocal interest rate hawk, economist Warren Hogan, has all but capitulated after recently tipping that the Reserve Bank of Australia (RBA) would hike rates a further three times by the end of this year.
A fortnight ago, Hogan also noted on Twitter (X) that discussions with businesses across the country revealed that consumer spending “stepped down big time from mid-April” – view supported by this week’s retail sales shocker:
Hogan subsequently told Sky News last week that the RBA was unlikely to hike rates again due to soft consumer spending [my emphasis]:
“Bracket creep alone has taken $41 billion out of household budgets in the last two years, that’s a pressure that’s there, so even though the RBA hasn’t raised rates this year, and only raised them once this financial year, we can still see the soft retail spending because of that bracket creep”.
“They’re not going to raise rates while the consumer’s this weak even if employment remains strong and even if inflation is just bouncing around at the top of that sort of 3% to 4% level”.
Following Wednesday’s slightly higher than expected monthly CPI indicator for April, Warren Hogan has again flipped to tipping more rate hikes, possibly starting in June:
“The higher inflation result today I think will tip them over the edge and I think there’s a very good chance we’ll see a rate hike in June.”
“The inflation picture is deteriorating, not getting better”.
“Look I think [another RBA interest rate hike] will just take some demand out of the economy”.
“It does raise an interesting and important question: whether one rate hike is enough to actually be meaningful?”
“It’ll obviously do a lot of damage to households that have got large mortgages and significant mortgage repayments”.
“There is a broader strength of demand”.
“Maybe there needs to be two more rate hikes”.
AMP’s deputy chief economist Diana Mousina disagrees with Hogan’s assessment and still believes that the RBA will cut late in the year:
“At their last meeting they said that unless inflation was moving out of its forecast that it was happy to keep interest rates where they were”.
“And the April inflation data was basically in line with the Reserve Bank’s forecast”.
“They think that inflation’s going to be running at 3.8%”.
Diana Mousina says it would be difficult to justify an RBA interest rate hike amid weak economic growth.
“The unemployment rate went up more than expected.”
“[There’s] very weak retail data, and the GDP result for next week is going to look pretty soft”.
CBA economist Stephen Wu cautioned that unfavourable base effects would keep the monthly CPI indicator elevated for a few more months. But that inflation would fall in Q3.
“Favourable base effects helped the decline in inflation from its late 2022 peaks. However, inflation outcomes over Q2 24 won’t benefit from base effects, given inflation in Q2 23 was 0.8%/qtr”.
“The next leg down in inflation will occur in Q3 24 for a couple of reasons. Q3 23 quarterly inflation was driven by the Fair Work Commission’s 5.75% award wage decision”.
“The FWC is due to hand down its decision for this year next Monday (3/6 at 10.30am). We anticipate a smaller award wage increase”.
“The other reason we expect a Q3 24 drop in inflation is because of Federal and state government rebates. An expected 20% fall in post-rebate electricity prices could see a run of monthly CPI prints at or below 3.0%/yr from July”.
Wu also cautioned that the March quarter nation accounts, due out next week, are likely a “soft quarter of economic growth to start 2024, with consumption growth weak and a big drag from the external sector”.
I am obviously in the camps of AMP and CBA.
The only factor in favour of hiking rates is the slightly stronger inflation.
Against that, we have seen: a deteriorating labour market; falling real wage growth; crashing housing construction; and weak business activity indicators.
The RBA’s job is to balance price stability with full employment. So it is weighing up slightly higher than expected inflation with an economy weakening by more than expected.
This will keep the RBA will keep rates on hold for the foreseeable future.
