The Reserve Bank of Australia (RBA) faces a critical decision as it prepares for its next interest rate meeting in early August. With the Australian economy slowing to its weakest non-pandemic pace since the early 1990s and the unemployment rate rising to 4.1 percent, the RBA must carefully consider its next move. In June, annual GDP growth stood at just 1.1 percent, showing no signs of improvement.
The unemployment rate, which was at a near 50-year low of 3.5 percent in mid-2023, has now increased, with an additional 117,000 people joining the ranks of the unemployed since October 2022. The RBA’s previous forecast in May predicted the unemployment rate would peak at 4.3 percent. However, given the recent economic downturn, this level now appears unrealistic.
Interestingly, the US labor market has experienced a similar trend, with the unemployment rate rising from 3.5 percent to 4.1 percent over the last year. However, US annual GDP growth has remained resilient, ranging between 2.5 and 3 percent, in contrast to Australia’s dramatic slowdown.
RBA’s upcoming rate decision factors
The key difference between the two countries lies in their interest rate expectations. In the US, the first interest rate cut is anticipated in September, with further cuts expected by the end of 2025. In Australia, despite weak growth and rising unemployment, the market is potentially pricing in interest rate hikes within the next few months, followed by a moderate easing.
Many market participants are focusing on the local June quarter inflation data, set to be released on July 31, as a potential trigger for a rate hike. However, given the slump in the economy and rising unemployment, the RBA is likely to revise its inflation forecasts lower, suggesting that an “on hold” decision is highly probable. Even if inflation rates slightly exceed expectations, the weak economy and rising unemployment are expected to be the dominant factors in the RBA’s considerations, especially given its dual mandate to maintain full employment and keep inflation between 2 and 3 percent.
The Australian economy is at risk of breaking the RBA’s mandate, with the unemployment rate expected to rise further. The RBA could present an outlook where growth remains weak at around 1 to 1.5 percent, the unemployment rate trends towards 5 percent, wages growth eases to 3 to 3.25 percent, and inflation stays within the 2 to 3 percent target from the next quarter – September 2024. Given this outlook, the next move in interest rates is likely to be down, as the RBA aims to support the struggling economy and protect borrowers from further financial strain.
