RBA raises cash rate to 3.35%
The Reserve Bank of Australia (RBA) today chose to continue down the path of monetary policy tightening, adding another cash rate increase of 25 basis points on top of the eight increases totalling three per cent in 2022. This takes the official cash rate to 3.35%. While there are early signs that consumers are now starting to reduce spending, and businesses are far less optimistic about the year ahead compared to 2022, the RBA clearly wants to see some sustained evidence of a cooling economy before pausing any further cash rate increases.
What the RBA does next will depend heavily on January’s retail trade result. The December result showed a marked slowdown in consumer spending in all categories and states, with sales falling 3.9 per cent month on month. A fall in total sales was to be expected given that Black Saturday sales now make November the peak sales month, therefore January sales will be closely watched. Inflation also appears to be moderating, and we should see further drops in the rate of price growth as data is now being measured off 2022 figures, when price rises had already kicked in.
Another factor that will be key to the RBA board’s decision making is business confidence and conditions. Here, NAB’s keenly observed monthly survey shows that business optimism is now dropping, after six months of plummeting consumer confidence. Business conditions fell by eight points in December, the third successive month of falls.
Business confidence did improve slightly, but there is still a wide gap between conditions and confidence. Capacity utilisation is also falling. This is a very good lead indicator of employment conditions, and gives us further evidence that the unemployment rate is probably going to rise throughout 2023, albeit moderately.
CreditorWatch’s own data indicates that business conditions going into the Christmas period were not following the same patterns as pre-COVID times. Usually, we would see a run up in average trade receivables per data supplier, before conditions moderated over the summer holiday period. This time, we have recorded falls in average trade receivables in October and only a very slight increase in November. This indicates that the peak of business activity may have already passed around the third quarter of 2022.
Overall, it appears the RBA’s efforts to slow the economy and cool inflation are working. How quickly and deeply this ‘cooling’ is felt by businesses will be key to determining what happens next to the cash rate.
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