Financial markets don’t expect a cut until April but a fall in the Australian dollar on Monday suggests confidence one is on the cards
A shopping surge on Christmas and Boxing Day could help determine the timing of interest rate relief as the Reserve Bank of Australia watches for a recovery in weak economic activity.
Consumers are predicted to splash $3.7bn in the last week of 2024 on top of an expected $70bn in the lead-up to Christmas, according to projections from the Australian Retailers Association and Roy Morgan.
The splurge, 2.7% more than households spent over the last week of 2023, would continue a resurgence in consumer spending, which the RBA has singled out as a key factor in deciding if a rate cut below the current 4.35% is warranted.
Minutes of the RBA’s December board meeting, released on Tuesday, show the board believed it was “too soon to judge” whether a Black Friday bump in sales would carry beyond the end of the year.
The board will next weigh whether to cut, hike or hold interest rates in February, when it will have revised forecasts and new data on spending, inflation and jobs.
“If the future flow of data continued to evolve in line with, or weaker than, their expectations … it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness,” the minutes read.
“If the data came in stronger, that process could take longer.”
Financial markets still expect no cut until April after the minutes were published, though the Australian dollar fell to 62.35 US cents, from 62.58 US cents on Monday, suggesting stronger bets a cut is forthcoming.
Board members at the December meeting kept their key interest rate on hold on the grounds the economy was still too hot, but the minutes show they believed it had become harder to make that call.
However, the board believed the risks of economic activity slowing down had started to outweigh the risks of it picking up too fast, after saying the risks were evenly balanced the month before.
Cost-of-living pressures had already seen consumption grow at half the rate the RBA expected through the first half of 2024, while overall activity measured by gross domestic product (GDP) expanded just 0.8% in the year to September.
The federal government has projected GDP growth for 2024 will undershoot RBA forecasts by a third to hit just 1% over the year.
If household spending slumped further than expected, the RBA has projected unemployment would rise to 4.6% by the end of 2025, well above the present rate of 3.9%.
The International Monetary Fund on Monday agreed risks were tilted toward a slowdown, given weak consumption domestically and poor growth prospects for key trade partners, such as China.
But it backed the RBA in keeping interest rates high due to the “significant risk” that inflation could stop falling and warned the federal government to avoid big pre-election spending, in its executive board’s end-of-year evaluation of the Australian economy.
“The current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance,” the IMF note read.
Major reforms to tackle Australia’s housing crisis, including the removal of the capital gains tax discount and review of other property taxes such as stamp duties, were also recommended in the note, as were boosts for construction workforce, looser zoning rules and support for housing projects.
But the IMF rejected calls from Coalition politicians to lower the interest rate test for first home buyers, instead directing lending regulators to prevent households from taking on too much debt.
Additional reporting from AAP
