The RBA Holds the Cash Rate Steady!

On 6 August 2024, the Reserve Bank of Australia (RBA) made a pivotal decision to keep its cash rate unchanged at 4.35% for the sixth time since November 2023. Michele Bullock, the current RBA governor, grounds this decision based on the latest data from the Australian Bureau of Statistics (ABS), which continues to paint a complex journey for the nation to achieve economic health.

Source: ABS

Inflation's persistent grip

As a pervading result of the rental crisis, escalating fuel prices, and soaring construction costs, Australia's Consumer Price Index (CPI) inflation rose to 3.8% in the year leading up to the June 2024 quarter, a slight increase from the 3.6% recorded in the March quarter. The sectors that have contributed most to the current inflationary pressures include:

1. Clothing and Footwear (3.1%)

2. Alcohol and Tobacco (1.5%)

3. Food and Non-Alcoholic Beverages (1.2%)

4. Housing (1.1%)

However, the CPI is not deemed the most accurate representation of Australia's true inflation that directly impacts the average Australian household. For a clearer picture, economists and the RBA often rely on the trimmed mean inflation, which strips away the 'noise' caused by volatile and one-off price changes. To understand this better, imagine inflation as a busy highway, where trimmed mean inflation acts like a lane filter. It helps us focus on the steady flow of traffic rather than sudden speeders and slowdowns. The trimmed mean inflation fell slightly to 3.9% in the June quarter compared to 4.0% from the March quarter. The trimmed mean therefore gives a more stable view of inflation but regardless indicates that Australia is far from reaching the RBA's target range of 2-3%.

Sticky Inflation: the stubborn challenge

One of the most challenging aspects of the current economic environment remains to be sticky inflation. Think of it as trying to slow down a massive ship - as you get closer to your destination, each degree of slowing down takes more and more effort. Sticky inflation is exactly this phenomenon where inflation slows as it approaches the target range (currently at 2-3%), making it harder for the RBA to achieve their goals.

Australia has seen a complete flip in their economic growth since the infamous slowdown during COVID-19. While economists generally expect economies to take considerable time to grow back into shape, Australia has faced a 'V-shaped recovery.' This is when the economy has a sharp increase in economic growth and has minimal lag in their recovery. Australia was able to achieve this with a strong 'opening-up effect' where people purchased and businesses invested heavily after lockdown laws eased and borders reopened, alongside strong fiscal and unconventional monetary policy stances. Whilst this promoted growth, it also escalated Australia into a cost-of-living crisis that emerged from large inflationary pressures, peaking at 7.8% in December 2022. Since, Australia has had a sluggish economic growth rate and the RBA has often conflicted with the fiscal policy, which aims to reinvigorate the growth rate rather than aiming for inflation only. This conflict has caused Australia's inflation to change at a slow pace, thus equating to sticky inflation.

Australia's economy is currently inching forward at a lower than modest pace. The March 2024 quarter saw growth of only 0.1% and an annual growth rate of just 1.1% from March 2023 to March 2024. This is well below the government's desired target of 2-4%. In conjunction with this, unemployment is also slowly rising, reaching 4.0% in June 2024. In response, the government is predicting a deep budget deficit of -$28.3 billion, including over $50 billion in stimulus injections by both Federal and State governments. While this aims to lift the pressures off the Australian households during these economic headwinds of a cost-of living crisis, it will add inflationary pressures that derail the RBA from cutting the cash rate.

Global uncertainties and the possibilities of a cash rate hike

Contrary to popular belief (and hope), the RBA's recent meeting considered the potential for a cash rate hike in response to rising inflation. RBA also considered the recent Japanese stock market, where large-scale liquidations and investor withdrawals triggered concerns regarding a financial contagion. Although a rate hike was not implemented, it underscores the fragility of the current economic landscape that remains unpredictable.

For the average Australian household, the prospect of a cash rate cut seems like a distant hope. However, the RBA remains firm on their target to return inflation to a range of 2-3% by late 2025. Economists are still predicting that a cash rate cut will occur by the end of the year, or February 2025 at the latest.

What lies ahead?

Australia's economy is navigating a narrow path marked by weak growth, rising unemployment, sticky inflation, excess demand and global uncertainties. The implications will become increasingly clearer in the coming years, but we must remain financially vigilant and economically informed to make the most of it. Now is the time to equip yourself with the knowledge and tools needed to navigate these challenging times. Stay ahead of the curve with VOSIX - your go to source for economic and financial updates tailored to your needs.