August cash rate: key economic indicators shaping the decision

The latest Australian Bureau of Statistics' (ABS) national accounts estimates revealed that the economy expanded just 0.2% quarter-on-quarter in Q1 2023, following a rise of 0.6% in Q4 2022. Although this represented the sixth consecutive quarter of economic growth, it was also the softest rise in the sequence.

Earlier this month, federal treasurer Jim Chalmers reiterated that the government and Australia’s central bank do not forecast a recession for Australia in 2023 or the next few years. However, the economy is only expected to grow at minimal levels through June 2025.

This dwindling expectation of economic growth may influence the Reserve Bank of Australia (RBA) to hold rates steady in August, so as not to further hamper consumer confidence and commercial activity.

The latest labour force data from the Australian Bureau of Statistics (ABS) shows that the unemployment rate remained at 3.5%, in line with the updated figure for May.

“The rise in employment in June saw the employment-to-population ratio remain at a record high 64.5 percent, reflecting a tight labour market in which employment has recently increased in line with population growth,” ABS head of labour statistics Bjorn Jarvis said.

The ABS' figure is slightly below professional services firm KPMG’s recent forecast of 3.6% unemployment in June.

Australia’s unemployment rate has remained relatively consistent for the past 12 months, hovering around 3.5% since August 2022. Considering this resilience, the RBA may consider raising or holding the cash rate next month in order to push unemployment higher.

The rate at which inflation is growing has eased over the past three months, according to the latest statistical data.

The ABS’ quarterly inflation indicator revealed that annual inflation increased 6.0% in the twelve months to June 2023. This represents a significant decrease in the pace of annual inflation from March's 7.0% rise, below economists’ forecasts.

The monthly indicator - released at the same time - rose 5.4% in the twelve months to June 2023, advancing the notion that the pace of inflation is slowing.

Services inflation

When prices of goods go up, it often leads to an increase in services inflation. This happens because goods are used in the early stages of making things, and then those things are implemented by the services industry. So, services inflation tends to lag behind the inflation seen in goods prices.

A service can be defined as something people are willing to pay for. It could be any task or assistance provided by, for example, rideshare drivers, barbers, doctors, lawyers, mechanics, banks and others. In simple terms, services are all about getting things done or getting help when you need it, and you pay for the convenience or expertise you receive.

Annual inflation for services rose to 6.3%, up from 6.1% in the March quarter and is the highest it’s been since 2001.

“This is the first time since September 2021 that services inflation has been higher than goods, highlighting the change from 12 months ago when goods like new dwellings and automotive fuel were driving inflation,” according to ABS head of prices statistics Michelle Marquardt. 

“Now price increases for a range of services like rents, restaurant meals, child-care and insurance are keeping inflation high,” Ms Marquardt said.

Although inflation has reached its peak, it remains well above the RBA’s 2-3% target band and is likely to remain sticky for some time. Some experts suggest that the lower-than-anticipated inflation number could result in the RBA holding rates steady. However, services inflation has crept higher and this may encourage the Board to raise rates in August to help tame inflation.

The latest ABS figures from the March quarter 2023, revealed that the Wage Price Index (WPI) rose 0.8% during the first three months of 2023 and was up 3.7% over the year to date.

The minimum wage rose from $21.38 per hour to $23.23 per hour at the beginning of July 2023. However, this increase only affects around 0.7% of the working population. Award workers on minimum wages received a 5.75% pay increase, representing around one fifth of the working population.

Considering these increases are still below the inflation rate and only affect a small proportion of workers, it doesn’t seem likely that wage increases have negatively affected inflation. Therefore, the RBA may be inclined to hold the cash rate in August.

The AUD/USD currency pair has been somewhat temperamental over the last few months (see graph below). The value of the Aussie dollar against the US dollar dipped below $0.65 in late May 2023 before peaking around $0.69 in mid-June and again in mid-July.

Australia’s big four banks generally expect the AUD/USD currency exchange rate to improve, albeit slowly, over the next few months and years.

If interest rates are too low, inflation can increase, which can decrease the value of a currency. On the other hand, if interest rates are high, inflation can decrease, which can increase the value of a currency.

With this in mind, it may be sensible for the RBA to keep rates on hold to preserve the strength of the Aussie dollar.

“The Board takes into consideration a wide range of factors, including domestic and international economic and financial conditions, along with the outlook for economic growth and inflation in Australia,” according to the RBA.

The key economic indicators examined above play a critical role in determining the cash rate at each Board meeting.

What's our prediction? Analysing the latest data affecting the upcoming decision, it seems reasonably likely that the RBA will hold the cash rate steady at 4.10% on Tuesday 1 August, 2023.

It’s important to note that this is simply a prediction and cannot be relied upon when considering personal and commercial financial decisions. Additionally, the RBA considers other domestic and international data when determining the cash rate each month. 

For further information, estimates and forecasts regarding the cash rate, see RateCity’s latest ‘How high will rates go?’ and ‘What to expect from the RBA’ articles.