The Reserve Bank of Australia (RBA) is faced with a significant decision as it gears up for its forthcoming interest rate gathering scheduled for early August. As the Australian economy experiences a downturn, reaching its weakest non-pandemic growth levels since the early 1990s, and with the unemployment figure climbing to 4.1 percent, the RBA must weigh its options with great care. As of June, the yearly GDP growth was recorded at merely 1.1 percent, with no signs of enhancement in the near future.
The unemployment rate, which previously reached a nearly 50-year low of 3.5 percent by mid-2023, has now seen an increase, with an additional 117,000 individuals becoming unemployed since October 2022. The RBA’s earlier estimate from May suggested the unemployment rate might peak at 4.3 percent. However, considering the current economic decline, that projection now seems overly optimistic.
Interestingly, a parallel pattern is observed in the US labor market, where the unemployment rate has risen from 3.5 percent to 4.1 percent over the past year. Nevertheless, the US has maintained steady annual GDP growth, fluctuating between 2.5 and 3 percent, in stark contrast to Australia’s significant slowdown.
Factors Influencing the RBA’s Upcoming Rate Decision
A major distinction between the two nations is their interest rate anticipations. In the US, the first reduction in interest rates is forecasted for September, with additional cuts expected by the conclusion of 2025. Conversely, in Australia, despite lackluster growth and increasing unemployment, market sentiments are possibly hinting at interest rate increases within the next few months, followed by a gradual easing.
Many market players are concentrating on the local inflation data for the June quarter, due to be released on July 31, as a possible catalyst for a rate hike. Yet, taking into account the economic downturn and rising unemployment, it is likely the RBA will adjust its inflation outlook downward, suggesting that a decision to keep rates “on hold” is highly likely. Even if inflation rates slightly surpass predictions, the faltering economy and increasing unemployment are expected to take precedence in the RBA’s deliberations, especially given its dual mandate to uphold full employment and maintain inflation within the 2 to 3 percent range.
The Australian economy is at the risk of jeopardizing the RBA’s mandates, with expectations for the unemployment rate to continue climbing. The RBA might convey a perspective that growth remains weak at approximately 1 to 1.5 percent, the unemployment rate approaches 5 percent, wage growth slows to between 3 to 3.25 percent, and inflation remains within the 2 to 3 percent target starting from the next quarter – September 2024. In light of this outlook, the next interest rate adjustment is likely to be a decrease, as the RBA aims to bolster the ailing economy and shield borrowers from additional financial pressure.
