Australian Economy
The RBA Board maintained the official cash rate at 5.35 per cent at its meeting on 19 March. In the accompanying statement the Board noted that inflation has eased over recent months in line with moderating goods prices although services price inflation remains elevated. The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026.
The December quarter national accounts showed growth slowing and household consumption is weak as the effects of cost-of-living pressures continue to impact on households. Labour markets have also weakened although have been resilient in the face of a slowing economy. The RBA remains in the data assessment phase and will be sensitive to movements in inflation going forward and will also be watching international developments closely. Australia has tended to lag other advanced economies in the movement up and then tracking down of inflation.
Just to ensure some strategic ambiguity remains in the market, the RBA Board statement notes “Returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. The Board needs to be confident that inflation is moving sustainably towards the target range……. The Board remains resolute in its determination to return inflation to target.” This tips the hat to some of the language other central banks have been using to dampen expectations of rapid decreases in official interest rates.
The latest NAB business survey confirmed also pointed to a soft economy, notwithstanding a small rise in business conditions. Business confidence is low and moved lower as the contraction in forward orders continues. The business conditions index rose by 3 points to +10, reversing the January drop. That has the index in line with the readings for November and December, which are sharply lower than a year earlier. Business confidence is at low levels with index declining in February by one point to 0. Businesses are responding to demand with a more cautious approach to spending, both for the labour market and investment.
The latest ABS Labour Force survey recorded a fall in the unemployment rate of 0.4 percentage points to 3.7 per cent (seasonally adjusted) in February. Total employment rose by 116,500 to 14,269,600 and the participation ratio remained strong at 66.7 per cent. Total unemployed people fell by 52,000 to 548,300. The positive result for unemployment will no doubt spark some media speculation on the implications for interest rates. However, the RBA will likely look through the monthly result in assessing the overall strength and direction of the economy and will unlikely change its stance towards interest rates cuts later this year.
International Economy
The US Fed Reserve has maintained official interest rates at 5.25-5.5 per cent at its meeting on 19-20 March. Despite recent upticks in the CPI and producer price indexes the Fed noted that inflation has eased although remains elevated. The CPI rose by 0.4 per cent in February while the producer price index (PPI) rose by 0.6 per cent which was double what market forecasters had expected. The Fed remains in data assessment mode, and it is looking for inflation moving sustainably towards the 2 per cent target before looking to reduce interest rates. Expectations remain that there will be three interest rates cuts in 2024.
The Bank of Japan (BOJ) has ended its negative interest rate policy which it has maintained for eight years. The BOJ increased its key interest rate from -0.1% to a range of 0%-0.1%. This move comes after a significant period of monetary stimulus aimed at reflating the Japanese economy. The most recent data shows that main inflation reading in Japan was 2.2 per cent in January and off the back of recent wage increases that were higher than in recent years.
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Wayne Calder
Director Economics
0424 852 384
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