The RBA today took the decision to leave the cash rate at 4.35 per cent for the seventh consecutive meeting, following last week’s reasonably positive June quarter CPI release. While the overall CPI figure increased by 3.8 per cent over the June quarter, up from 3.6 per cent over the March quarter, the trimmed mean measure of inflation, which removes volatile items, actually fell slightly between the March and June quarters.

This RBA board will be reasonably comfortable that the cash rate at 4.35 per cent is having the required effect of cooling demand. Demand has certainly cooled significantly in areas of discretionary retail and the café and restaurant sector. Retail trade quarterly volume data showed that the volume of retail goods sold per capita has fallen every quarter for eight quarters in a row.

This means that any increase in retail trade spend is driven mostly by price increases and population growth. It appears that the RBA will be comfortable with inflation falling at a slower pace, and is no doubt aware that its current settings are hurting certain businesses and households far more than others. It is also possible that an increase to the cash rate actually fuels demand, given that the large ‘baby boomer’ cohort of the population tends to have little to no debt and cash in the bank attracting higher interest earnings.

Looking forward, in all likelihood, the RBA will begin to cut the cash rate before inflation gets back within the target band. This is because of the known lag effect of tightening monetary policy, and it will be very keen to not undo the remarkable gains in employment and the labour force over the last few years.

CreditorWatch’s June Business Risk Index (BRI) data also points to significant cooling in business activity, with the average value of invoices held by businesses having fallen 49.9 per cent over the year to June 2024. Holding the cash rate at this peak for too long risks causing further, unnecessary pain on many small businesses, particularly in the construction, retail and hospitality sectors.