If the Reserve Bank board were the Matildas, Australia would be leading 1-0 at half-time with a good chance of securing the win if the second half goes as planned.
At the risk of overdoing sporting parallels, the central bank is happy with the way the economy is trending and sees no need yet for radical substitutions (calf injuries or not).
Tuesday’s interest rate pause surprised about half of economists, some of whom will be explaining to their trading desks how they have kept misreading the play.
To be fair, a plausible case for leaving rates on hold or hoisting them for a 13th time can be argued from the available array of statistics. The Martin Place martinets look at the same data and were obviously content to stay put.
Whether the RBA remains settled – and stressed borrowers can finally start to relax – depends on a few results we won’t know for a while at least. Come Friday, when the bank releases its updated quarterly statement on monetary policy, we’ll also get an extended view out to the end of 2025 of where they think the economy is heading.
And on 15 August, we’ll get the Australian Bureau of Statistics’ laggard, the June quarter wage price index. A spike – unlikely given the past decade’s suppression of salaries – would make a September RBA rate rise much more likely.
However, it’s not just what Australia brings to the field that will determine whether more interest rate pain will be needed to secure our objectives.
Some of the drivers, both good and bad, will come from abroad, says Warwick McKibbin, a former RBA board member. and the current director of ANU’s Centre for Applied Macroeconomic Analysis.
McKibbin forecasts one or two more rate rises to come despite maintaining his view that a disinflationary “pulse” is heading Australia’s way.
China’s faltering recovery from their extensive Covid lockdowns, for instance, will mean the world’s second biggest economy demands less from Australia (and other exporters) while lifting its supplies of goods such as electric cars and other electronics.
Australians, though, won’t get the benefit of that international trend if our dollar falls faster, lifting the cost of imports – from China or elsewhere – in local terms.
The US and the European Central Bank both recently lifted their interest rates even as inflation retreated, McKibbin notes. With the RBA leaving its cash rate unchanged for a second month, possibly longer, the Australia dollar might have further to tumble.
There are also at least two big domestic risks looming on the sidelines, neither of which the RBA can do much to alleviate with interest rates.
One is the crisis facing renters. According to NAB, “rents will continue to add strongly” to the consumer price index. Indeed, the gap between asking rents and the outstanding stock of rents has widened to 21.3 percentage points.
Rising rental demand is thanks in part to a swelling population and there’s no increase in sight for supply. (Housing approvals fell 7.7% in June, the ABS said on Tuesday.)
It’s a trend “that could derail the speed of how fast inflation comes down”, McKibbin says.
And there’s the looming climate shock. The Bureau of Meteorology held off declaring an El Niño event in the Pacific on Tuesday but the remarkable weather extremes in the northern hemisphere and for Antarctic sea ice to the south will bring little solace.
Southern Australia continues to dry out – El Niño or not – with the country’s south-east recording its driest July since 1997, fresh bureau data showed.
July was the driest for south-eastern Australia since 1997, @bom_au data shows. pic.twitter.com/oT49Bqnkad
— @phannam@mastodon.green (@p_hannam) August 1, 2023
Insurance premiums were among the prices to jump at the start of financial year. Should drier times prevail, a range of food prices can also be expected to climb over the coming year, McKibbin says.
Little chance, in other words, to expect we’ll be coasting through the second half.
