AUSTRALIAN SOCIETY STATE OF PLAY: Interest rates and cost of living - there is no good news in November 2023

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The Reserve Bank of Australia as one of its monetary policy decision tools employs a cash rate target.

In the Reserve Bank's own words:

The cash rate is the interest rate that banks pay to borrow funds from other banks in the money market overnight. It influences all other interest rates, including mortgage and deposit rates.

In technical terms, it is the interest rate on unsecured overnight loans between banks (loans banks use to manage their liquidity). It is our operational target for the implementation of monetary policy.

The Bank's inflation target is; to keep annual consumer price inflation at between 2 and 3 per cent, on average, over time.

On 7 September 2016 the Australian Reserve Bank cash rate target stood at 1.50% and it remained unchanged for over two year and seven months, until it fell by 25 basis points to 1.25% on 5 June 2019.

The cash rate target continued to fall the next five months until it reached 0.10% on 4 November 2020 and remained unchanged until 4 May 2022 when it rose to 0.35%.

Since then the monthly cash rate target announcements began to tread water on 5 July 2023 at 4.10%.

Sadly, on 8 November 2023 the cash rate target again rose by 25 basis points to 4.35% - the 13th rate hike since May 2022.

The Reserve Bank's next monthly target announcement is due on Tuesday, 5 December 2023.

As for the Reserve Bank's inflation target of keeping consumer price inflation at between 2 and 3 per cent, this target range had been met consistently for the ten and a half years up to December Quarter 2021 and ever since been consistently exceeded. Peaking at 7.8% in December Quarter 2022 before gradually falling to 5.4% in September Quarter 2023 with a monthly indicator of 5.6%.

I suggest that readers do not anticipate any interest rate relief this coming December. Nor expect any significant fall in the Living Cost Index or Consumer Price Index as the country enters 2024.

If The Guardian article on the latest Essential Research poll is correct, it is likely that the more than half of all Australian voters who reportedly are struggling financially will read the following with a jaundiced eye.......

Reserve Bank of Australia, MediaRelease, 7 November 2023:

Statement by Michele Bullock, Governor: Monetary Policy Decision Number 2023-30

Date 7 November 2023

At its meeting today, the Board decided to raise the cash rate target by 25 basis points to 4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.25 per cent.

Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.

The Board had held interest rates steady since June following an increase of 4 percentage points since May last year. It had judged that higher interest rates were working to establish a more sustainable balance between supply and demand in the economy. Furthermore, it had noted that the impact of the more recent rate rises would continue to flow through the economy. It had therefore decided that it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest rates so far. In particular, the Board had indicated that it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.

Since its August meeting, the Board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased. While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.

At the same time, high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. This is a more moderate increase than previously forecast. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.

Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

There are still significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. And globally, there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.

Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

Everyone is hoping that the Reserve Bank of Australia continues to restrain the urge to raise interest rates today

IMAGE: Depositphotos

By late August 2023 mainstream media was reporting that in the 2022-23 financial year supermarket giants Coles and Woolworths recorded profits in excess of $1 billion representing around a 5% increase on the previous year - withy Woolworth’s recording a nearly 20% rise in grocery sector earnings while Coles recorded a 2.9% rise.

These grocery earnings being an almost direct cash transfer from dwindling household piggy banks to supermarket chain bank accounts.

In August the major banks were also reporting fat financial year profits, with the Commonwealth Bank coming in with a personal record breaking best of $10.2 billion in 2022-23.

None of the big banks being slow in coming forward to pass on increasing Reserve Bank of Australia cash rates onto customers, including those with home mortgages.

According to the ABS latest monthly consumer price index indicator, rent prices increased 7.6% in the twelve months to July 2023, up from 7.3% in June, reflecting strong demand for rental properties and tight rental markets.

Electricity prices rose 15.7% in the twelve months to July 2023, reflecting annual price reviews in July.

Annual prices for food and non-alcoholic beverages rose 5.6%, down from the rise of 7.0% in June, with dairy and related products rising12.7% and bread & cereal products rising 9.9% even if fruit & vegetables fell by -2.9%.

The actual pain of cost of living pressures are of course rarely mentioned by the Reserve Bank of Australia or the statisticians.

Australian Bureau of Statistics (ABS), media release, 4 September 2023:

Household spending was 0.7 per cent lower when compared to July last year, according to figures released today by the Australian Bureau of Statistics (ABS).

Robert Ewing, ABS head of business statistics, said households have curbed their spending over the past 12 months amid higher interest rates and inflation.

“This is the first time since February 2021 that the spending indicator has fallen.

“Spending on discretionary goods and services was down for the fourth straight month. It fell 3.3 per cent over the year, as households adapt to cost of living pressures.

“Non-discretionary spending rose 1.7 per cent, which is the lowest growth rate since early 2021.”

The Sydney Morning Herald, 4 September 2023:

The largest fall in spending on goods including clothing, footwear and home furnishings since the start of the Delta wave of the pandemic has bolstered the case for the Reserve Bank to hold interest rates steady for a third consecutive month.

Outgoing RBA governor Philip Lowe will on Tuesday helm his last meeting of the board, which is widely expected by economists to keep the official cash rate at 4.1 per cent as the economy continues to show signs of slowing and inflation pressures ease.

Because someone has to say it: By Dec 2023 it's likely converging & merging weather and climatic conditions will see not only cost of fruit, vege, eggs, dairy products, meat & basic foodstuffs rising - it will see availability & supply become issue to varying degrees across Oz.

— no_filter_Yamba (@no_filter_Yamba) September 1, 2023

 

Reserve Bank of Australia raises the interest rate yet again - promising more of the same in coming months. Recession worries begin to emerge

 

On the 7 February 2023 the Reserve Bank of Australia (RBA) increased the official cash rate by 0.25%. The current official cash rate as determined the RBA is now 3.35%.

As we reach the ninth official cash rate rise since 4 May 2022, the Reserve Bank Governor’s words set out below are less and less reassuring.

According to the Australian Stock Exchange (ASX) RBA Rate Tracker:

As at 8 February, the ASX 30 Day Interbank Cash Rate Futures March 2023 contract was trading at 96.525, indicating a 65% expectation of an interest rate increase to 3.60% at the next RBA Board meeting.

The next RBA Board meeting and Official Cash Rate announcement will be on the 7th March 2023.

Reserve Bank of Australia

Media Release

Statement by Philip Lowe, Governor: Monetary Policy Decision

Number 2023-04

Date 7 February 2023

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.35 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.25 per cent.

Global inflation remains very high. It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy. It will be some time, though, before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.

Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

The Australian economy grew strongly over 2022. The central forecast is little changed from three months ago, with GDP growth expected to slow to around 1½ per cent over 2023 and 2024. The recovery in spending on services following the lifting of COVID restrictions has largely run its course and the tighter financial conditions will constrain spending more broadly.

The labour market remains very tight. The unemployment rate has been steady at around 3½ per cent over recent months, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, but have declined a little recently. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase. The central forecast is for the unemployment rate to increase to 3¾ per cent by the end of this year and 4½ per cent by mid-2025.

Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the expected slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.

The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. The Board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.

The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

[my yellow highlighting]

The Sydney Morning Herald, 9 February 2023: 

There is a better than 50-50 chance Australia could fall into recession due to the Reserve Bank’s aggressive increases in interest rates, economists believe, as a growing group of Labor MPs suggest the seven-year term of RBA governor Philip Lowe should not be extended. 

Macroeconomics Advisory chief economist Stephen Anthony said the chance of a recession next year could be as high as 70 per cent due to the impact of the RBA’s high interest rates, coupled with a slowdown in key markets such as China.

Pressure on Lowe has intensified after the RBA pushed interest rates to a 10-year high this week and signalling more than one further increase in coming months. Lowe, whose seven-year term ends on September 17, had signalled in late 2021 that rates would remain on hold until 2024. 

The previous two governors, Glenn Stevens and Ian Macfarlane, both had their terms extended by three years. But with a sweeping review of the central bank due to be finalised and handed to Treasurer Jim Chalmers in late March, there is a growing expectation that Lowe will not stay on beyond September. 

Within the government, there are now open questions about Lowe’s long-term tenure at the bank.....