Interest rates peak in Australia

It is likely that Reserve Bank of Australia will maintain its current interest rate when it convenes its board of directors for August on the following Tuesday.

Philip Lowe, the outgoing governor of the Reserve Bank of Australia, has made it his mission over the past year and a half to steer the Australian economy along a “narrow path” between the dangers of excessively high inflation and a too-rapid growth deceleration.

The fact that the route may be slightly wider because consumer price rises in the June quarter were lower than predicted indicates this. It is likely that Reserve Bank of Australia will maintain its current interest rate when it convenes its board of directors for August on the following Tuesday.

The results for retail trade in June, which will be released on Friday, will undoubtedly show that shoppers are cutting back, presenting the central bank with the final significant datapoint to analyze. According to ANZ’s tracking, consumer spending in the first 22 days of July fell by more than a tenth compared to the same period a year earlier. This was the case “despite ongoing inflation and strong population growth.”

However, it would be imprudent to rule out the possibility of additional rate hikes, either by Lowe before he leaves his position as governor in the middle of September, or by his pathfinding successor, Michele Bullock.

Since reaching its highest point in December, when it reached 8.4%, inflation has certainly been declining. The reading for June was lower by three percentage points, coming in at 5.4%; if this trend continues, we will fall inside the range of 2% to 3% that is recommended by the RBA by the end of the year.

Some cases, like that of the United States, give rise to optimism over deflation. The annual inflation rate in the United States has fallen from 9.2% to 3% in the past year without the economy coming to a halt.

However, there are a few notes of concern that ring out from Australia’s inflation mix. The annual percentage change in the price of goods was 5.8% for the quarter ending in June, compared to 7.6% for the quarter ending in March. This indicates that the pace of price growth for goods has continued to decelerate.

However, this decline was mainly anticipated in light of the fact that global commodity markets are still in the process of resetting themselves in the wake of the disturbances that were caused by Russia’s willful assault on Ukraine.

There is no guarantee that the cost of energy will continue to decrease. Large suppliers, such as Opec, have reduced output in order to maintain price stability, and it is likely that they will continue to do so.

The unpredictability of Moscow, as demonstrated by its withdrawal from a grain export pact and its missile attacks on Ukraine’s ports, may also reverse the decline in global food prices that so many people had been depending on.

The severe summer weather that affects the northern hemisphere will not aid agricultural production in any way. The RBA provided its own set of ominous forecasts for the southern region:

According to what was stated in the company’s board minutes from the month of June, “The increased likelihood of an El Nio event in 2023-24 and an associated downgrade for agricultural production could put upward pressure on some food prices over the coming year.”

The Reserve Bank of Australia has, for some time now, been focusing a great deal of its attention on the services sector as its primary concern on the incubation of inflation. Those results for the June quarter won’t be enough to break that focus either.

The annual rate of inflation for services reached its highest level since the Goods and Services Tax (GST) was introduced in 2001 when it accelerated to 6.3% from 6.1% in the March quarter.

According to Steven Wu, an economist at the CBA, “labor cost growth has been correlated with inflation in the services sector, particularly inflation in the market services sector.” “Offshore services inflation has remained sticky despite central banks lifting rates higher than here in Australia,” yet “we note that real wages outcomes elsewhere have been stronger.”

According to Australian Bureau of Statistics, rise in prices for rentals and utilities was the primary driver of inflation in the services sector.

Neither one of those aspects offers a lot of cause for optimism. This month saw an increase in the cost of power for many customers, with some rates going up by as much as a third. Just for the quarter ending in June, rents increased by 2.5%, marking the largest annual increase since 1988.

Consumer Price Index data for July will reflect a variety of other price changes, including those for insurance and daycare.

The Australian Bureau of Statistics (ABS) is going to issue the statistics for the wage price index for the June quarter on August 15, which is roughly three weeks behind consumer prices.

Two days after that, we get the employment numbers for July, which will tell us whether or not businesses are still actively recruiting additional personnel at the frenetic pace seen in June. It’s possible that wage growth is finally picking up as well.

Add to it the rise in housing values and what that could signify in terms of additional spending that the RBA had not factored in.

In other words, that narrow path can yet end up being quite lengthy and twisting.

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