The Reserve Bank of Australia (RBA) is not shying away from its goal of bringing inflation back inside the target band, and today further increased the cash rate target. Retail trade, labour force and business sentiment data all point to continued ‘heat’ in the economy, even though consumer sentiment and house prices continue to weaken.

We expect that the RBA will not hit the pause button on cash rate increases until retail trade data begins to better reflect downbeat consumer sentiment. However, this will not happen as soon as the upcoming Christmas shopping period. It is likely by December that mortgage holders will be really feeling the effects of higher repayments, and of course higher prices of everything from furniture, to eating out and to holidays.

However, increasing the complexity for the RBA is the record low unemployment rate. NAB’s Business Conditions survey shows that businesses are operating at record capacity, which is a very good leading indicator of unemployment. Coupled with still low migration, the labour market is poised to remain tight for some time. The risk is that this encourages continued high consumption, even when sentiment is low, and the RBA is forced to continue to increase the cash rate target.

On the flip side, households are finally starting to work through their savings, which could start making more consumers pull back their spending. The question is, will consumers be spooked enough by their savings falling to reduce their spending, even when job security is so high? Retail spending data, coupled with the now exceedingly important anecdotal data from the major retailers, will give us further insight over the next few months leading into Christmas.