Yahoo Finance Key data that will determine whether RBA hikes, holds or cuts interest rates
There has been good, bad and ugly news for the Australian economy.
It’s been a big few days for updated news on the Australian economy. It is all important news when it comes to determining the next move in official interest rates.
Suffice to say, the economy is in a position where the pressure is intensifying on the Reserve Bank (RBA) to ignore the frantic calls for interest rate hikes and to lay out the case for the start of an interest rate cutting cycle. Like most things in economics, there is some bad news and some good news.
The bad news is that the economy remains weak. Retail sales rose a tiny 0.1 per cent in April, after falling 0.4 per cent in March. In trend terms, retail spending has been dead flat for the past six months. When account is taken of population growth and price increases, retail spending is suffering from one of its weakest episodes in 40 years.
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Consumers have not only been crunched by cost-of-living pressures, rising rents and a huge increase in mortgage interest rates, but the recent softening in labour market conditions is hurting consumer sentiment and with that, spending.
News on construction activity was even worse. In real terms, new construction activity fell by a hefty 2.9 per cent in the March quarter with weakness across engineering, dwellings and non-residential activity.
This fall puts a large hole in the March quarter GDP result, due for release next week, a position which is all the more problematic given the retail sales and net export data, both of which will undermine March quarter GDP.
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The news on inflation was benign – with annual inflation ticking up to 3.6 per cent in April, from 3.5 per cent in March and a peak of 8.4 per cent in December 2022. The make-up of the inflation result would be on some marginal comfort for the RBA with a number of price pressures outside their direct control and therefore not in the main focus of its interest rate settings – areas such as tobacco, insurance, petrol and rent.
The next RBA interest rate announcement is June 18, by which time there will be yet more information on the global economy, Australian news on economic growth, the labour market, construction and housing.
No one is expecting that potpourri of data to be anything other than weak. Annual GDP growth is set to fall below 1.5 per cent, the unemployment rate will remain well above the 2023 lows and housing activity remains well below the levels needed to meet the strong immigration-induced demand. All eyes will be on the labour force data given the greater emphasis given to unemployment in the revised RBA mandate.
The RBA is likely to be on hold in June.
As is always the case with careful analysis of any business cycle, economic pressures and priorities change with that cycle.
Unemployment 'key issue' for rates
Unemployment is overtaking inflation as the key issue for RBA interest rates and other economic policy deliberations. Even with the data for April, inflation is on track to fall to within the 2 to 3 per cent target before year's end.
In 2022 and 2023, the inflation rate was 8.4 per cent and the unemployment rate was 3.5 per cent.
Fast forward to the latest data and the unemployment rate has lifted to 4.1 per cent, with more upside momentum to come, while inflation is 3.6 per cent with more downside momentum to come.
Indeed, the Budget forecasts are for unemployment to hit 4.5 per cent and inflation 2.5 per cent, a result that would demand interest rate cuts from the RBA to avoid an "overshoot" to even higher unemployment and lower inflation.
All of which points to the RBA, Treasury and market participants remaining on ‘data watch’ to make sure the economy does not weaken even more than is currently forecast.
Each monthly and quarterly update will be scrutinised for clues about the health of the economy and when the start of the rate-cutting cycle will start.
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