Morning Update: Hawkish Remarks From RBA

As markets seek forward guidance from the Reserve Bank of Australia, this morning Governor Michelle Bullock said that it was “premature” to discuss cutting rates.

Bullock’s comments follow the Reserve Bank of Australia decision to keep its benchmark rate unchanged at 4.35%, earlier this month. This marked the sixth consecutive hold as inflation continues to remain above the central banks 2-3% target, having risen from 3.6% in Q1 to 3.8% over the second quarter of 2024.

While this marks a considerable slowdown from Australia’s recent peaked of 7.8% registered in Q4 2022, the rise in inflation between Q1 and Q2 marked the first time the rate of inflation had risen since Q4 2022.

Against a context of rising levels of inflation, Bullock said that: “Inflation is still too high and, in underlying terms, is not expected to be back in the top of the band until the end of next year. Circumstances may change, of course, and the outlook is uncertain. But based on what the Board knows at present, it does not expect that it will be in a position to cut rates in the near term”.

Bullock – who’s comments were made during a speech to the House of Representatives Standing Committee on Economics – also said that the central banks forecasts have underlying inflation by the end of this year still sitting around 3.5 per cent.

Slowing growth and a cooling labour market mean that the RBA continue to navigate across a precarious monetary policy tightrope, however. Commenting on the “highly uncertain” economic outlook Bullock said that “even though growth in the economy has been weak, the level of demand for goods and services is still higher than the ability of the economy to produce those goods and services.”

This morning, data from the ONS indicated that UK retail sales saw a rebound over the course of July, making advances from June’s contractionary print.

On a monthly basis, UK retail sales appreciated 0.5%, meeting market expectations and rising from last month’s print of 0.9%.

Sales volumes also rose by 1.1% in the three months to July 2024, when compared with the three months to April 2024.

An uptick in sales at non-food stores fed was a key driver behind the latest figures, as was increased spending at department stores and sports equipment stores. The Euros football tournament and summer discounting were also cited as an important component of growth, though a slowdown in spending in clothing and furniture shops offset some of this growth.

Moreover, notwithstanding the rebound in sales throughout July, retail sales remain 0.8% below their pre-coronavirus pandemic level in February 2020.

With the UK’s retail sector accounting for £112.8 billion of economic output in 2023 (or around 4.9% of the country’s GDP), such figures reveal the scale of the challenges still facing this major part of the economy.

As we looked at last month, in a recent document published by the House of Commons Library, the article highlighted how longer-term challenges facing the retail sector have merely been exacerbated by the pandemic and cost of living crisis. Here, it cited research from the Centre for Retail Research which said that the retail industry has been subject to a “permacrisis” since the 2008 financial crisis.

Firstly, the Centre for Retail Research said that “Rapid debt-fuelled expansion of shops in the 2000s” had “pushed city centre rents to astronomical levels.” This meant that high rental costs put considerable pressure on profit margins which amongst other things meant that there was “low investment in stores and weak forward planning to meet the challenges of the new retailing”.

While challenges facing the UK retail sector was highlighted in the State Opening of Parliament, key figures such as the Chief Executive of the New West End Company which works with over 600 business said that “thorny issues” such as a “much-needed business rates reform” and “a review of tax-free shopping” was needed.

For more on the topic, the full article can be found qui.

With the Jackson Hole Symposium being held next week, it’s just been announced that Fed Chair Powell will headline the event.

With focus on the extent to which central banks will ease policy amid concerns around stubborn inflation, growth, labour markets and geopolitical risk, thousands of policy makers, economists, academics, and commentators will meet to discuss monetary policy and growth.

Powell’s comments will come against a backdrop of charges amongst market participants that the Fed have kept rates too restrictive and unnecessarily raised the chances of the US dipping into a recession.

Earlier this month for example, a string of PMI and labour market data which missed expectations – in addition to a flurry of corporate earnings which did the same – raised recessionary fears. That said most economists still see the US making a soft-landing with growth remaining relatively robust.