The Reserve Bank of Australia (RBA) has emphasized its commitment to maintaining interest rates at the highest level in 12 years, even as the economy faces challenges from rigid inflation, a cooling labor market, and slowing growth rates.
During its August monetary policy meeting, the RBA left interest rates unchanged, highlighting the upward risks to inflation and stating that no rate cuts are on the table for this year. The monthly Consumer Price Index (CPI) data released last week showed that inflation eased from 3.8% to 3.5%. However, this data indicated that price pressures have lessened but not rapidly enough to warrant early rate cuts.
In a statement yesterday, RBA Deputy Governor Andrew Hauser expressed that rates must be kept unchanged until there is confidence that inflation is on a sustainable path toward the target. Hauser also noted that while the global peers' initiation of rate-cutting cycles has not altered the local policy outlook, the RBA will consider global prices and other central banks' rate cuts in its upcoming decisions.
As RBA officials continue to deliver hawkish messages, markets have not entirely ruled out the possibility of a 25-basis-point rate cut this year. Expectations are fueled by a belief that the RBA will not act contrary to its global peers and by developments in the labor market and growth outlook.
Australia's Rising Unemployment Pressures RBA
The ongoing rise in Australia's unemployment rate keeps labor market developments in focus. Data released two weeks ago showed that the unemployment rate in July climbed to 4.2%, the highest level since February 2022. Additionally, the Job Advertisements report released yesterday revealed a 2.1% decline in August, indicating that the growth in private payrolls continues to slow.
Data indicating that the labor market is becoming less tight raises questions about how much tolerance the RBA will have for labor market risks.
Australia’s Q2 Growth Expected to Remain Weak
The data to be released tomorrow is expected to show that the Australian economy grew by 0.3% (QoQ) in the second quarter. Besides, annual growth is projected to drop to 1.0%, marking the slowest growth rate since the recession of the early 1990s.
The primary driver behind the second-quarter growth forecasts is the increase in public demand. Additionally, while goods exports are expected to decline, services exports, fueled by contributions from international students, are anticipated to continue growing.
On the other hand, private demand is expected to remain weak. Australian households grapple with rising living costs due to high interest rates and rigid inflation. Moreover, the cooling labor market exerts further downward pressure on household consumption spending.
If the data aligns with forecasts, it will confirm that economic growth remains weak. However, some economists point out that although the GDP growth result will fall just slightly below the RBA’s forecasts, it may not be sufficient to alter the policy outlook. Nonetheless, the Q2 figures will not prompt the RBA, concerned about lackluster productivity for some time, to set aside the risks to growth.
It would be critical to understand how the incoming data will impact the policy outlook as the RBA attempts to balance inflation, growth, and labor market risks.