Why the RBA Should Continue to Hold the Cash Rate

As the Reserve Bank of Australia (RBA) approaches its August meeting, several critical economic data releases will shape its decision on whether to hold or alter the cash rate. On July 18th, monthly unemployment data will be released, followed by quarterly inflation data on July 31st. These data points will provide insights into the health of the economy and the effectiveness of current monetary policy.

The RBA will be particularly interested in observing a stable or slightly increased unemployment rate and a continuation of the downward trend in quarterly inflation. These indicators will help determine the necessity of further rate changes. Here are six compelling reasons why the RBA should maintain the current cash rate:

1. Economic Slowdown

The economy has experienced a significant slowdown. Year-on-year real retail sales have fallen, and household spending remains flat to negative. Increasing the cash rate in such a scenario could exacerbate the economic deceleration, reducing consumer confidence and spending power even further.

2. Resumption of Inflation Downswing

Weak demand signals that inflation is likely to continue its downward trend. Recent data indicate a decrease in both cost and selling price inflation. Maintaining the current cash rate can support this trend, preventing unnecessary pressure on prices.

3. Cooling Labour Market

The labour market is showing signs of cooling, with rising unemployment and underemployment rates. This suggests slower wage growth and reduced services inflation. Holding the cash rate steady could help stabilize the labour market without putting additional strain on employment conditions.

4. Global Inflation Trends

Globally, inflation is receding, with many countries starting to cut their rates. This trend suggests that Australia might follow a similar path. A stable cash rate would align with global economic conditions, ensuring that Australia's monetary policy is in sync with international trends.

5. Higher Mortgage Rate Impact

Australia has seen a higher rise in average outstanding mortgage rates compared to comparable countries. This has significantly impacted households, increasing the cost of living and reducing disposable income. Holding the cash rate steady can help mitigate further financial strain on households.

6. Modest Budget Stimulus

The recent Budget was relatively modest in its stimulatory impact. This is likely to lead to a downward revision in RBA inflation forecasts, further supporting the case for maintaining the current cash rate. A stable rate can help ensure that the modest fiscal stimulus has a positive effect on the economy without being offset by higher borrowing costs.

With the upcoming release of crucial economic data, the RBA has an opportunity to reassess the impact of its current monetary policy. Given the significant economic slowdown, cooling labour market, and the global trend of receding inflation, there is a strong case for holding the cash rate steady. This approach would support a stable economic environment, alleviate financial pressures on households, and align with global economic conditions. By maintaining the current cash rate, the RBA can foster sustainable growth and ensure a balanced approach to economic management.