RBA decision — will rates move up or down?
We’ve got an RBA meeting next week and a Federal Budget the week after. God help us! Two arms of the same body, both moving in opposite directions.
The RBA meets next week as part of a new 2024 calendar of meetings. The May 6 meeting will be followed by a May 7 decision and accompanying media frenzy. At the centre will be the higher than expected first quarter inflation numbers and the rebound in employment numbers in February.
We’re holding up better than expected
I must admit, inflation is stickier than I thought by this point. The economy is holding up better than I expected. With all the rate rises, the job market is doing extremely well. Unemployment is still sub 4% and even though the sentiment has softened, it probably hasn’t softened enough to relieve the RBA that inflation is under control.
When I look through the inflation numbers, I see a mixed bag. Food inflation is still a problem. Education costs are a reflection of a strong jobs market. Cigarettes and fuel are heavily taxed. Apparel and holidays are coming down, but they probably have to fall more before the RBA is satisfied. Insurance actually goes up with each rate increase, as do rents.
Yes, inflation is too high. But I’m just not sure that putting rates up more will be the best possible way to bring down. It might actually make it worse.
A few stubbies short of a six-pack
With a budget around the corner, it’s really time for the government to step up with tighter fiscal policy to ease inflation. But I also can’t see the government doing what’s right vs doing what’s popular.
The Labor Party’s popularity is on the decline, particularly in marginal seats that it needs to hold if it wants to form majority government next year. I think it’s very unlikely that we will see a tightening budget, instead a lay up for election spending next year.
Ultimately, the government will be punished at the ballot box. But modern day politicians don’t have the capacity to look beyond the next few months. That is why 4 million Australians report having no value connection to any political party. Particularly renters. I don’t blame them.
Bottom line: So where does that put us? In a holding pattern until jobs and economic data start to really get bad. I think the RBA will want to see some more evidence before making its next decision on rates. I do think they will continue with the jawboning commentary, cautioning next week that rate rises are still possible. We’ll start to see jobs and spending data continuing to soften into the second half of the year and rate cuts probably early next year, rather than late this year.
The real estate market remains very strong with house prices up again this month, now 8.7% higher than last year. As long as migration continues, I can’t see them falling, and housing will become even more expensive the longer interest rates remain at current levels. Clients we speak to every day are still looking to invest and get into the market.
I don’t blame them, as the market is still very attractive and lenders are willing to do business.
Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.