Will the RBA hike the cash rate in September? 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.

However, this report was released in June and the next quarterly estimates for Q2 2023 won’t be available until Wednesday 6 September - the day after the RBA makes their decision.

The Organisation for Economic Co-operation and Development (OECD) - of which Australia is one of 38 member countries - found GDP among the combined OECD nations rose by 0.4% quarter-on-quarter in Q2 2023, slightly down from 0.5% growth in the previous quarter, according to provisional estimates released this week.

While this data incorporates an array of vastly different economies and is not reflective of Australia’s individual situation, it does indicate that global GDP continues to trend downwards.

Over the weekend, federal treasurer Jim Chalmers reiterated that while the government and Australia’s central bank do not forecast a recession for Australia, the economic outlook for growth remains relatively bleak - pointing the finger at China’s sputtering economy.

“Our economy is weakening as a consequence of what's happening in the world and what's happened with interest rates, at the same time as inflation is moderating,” Chalmers told Sky News.

“We still expect… for the Australian economy to continue to grow, but that growth will be substantially weaker. And the two biggest challenges, I think, to that growth outlook is what's happening in China is a big part of that story, but also the lag impact of all of those interest rate rises in the system.”

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

The latest labour force data from the ABS shows that the unemployment rate rose to 3.7% in July. The result was a moderate increase on the 3.5% figure reported in June.

“The fall in employment follows an average monthly increase of around 42,000 people during the first half of this year. Employment is still around 387,000 people higher than last July,” ABS head of labour statistics Bjorn Jarvis said.

“July includes the school holidays, and we continue to see some changes around when people take their leave and start or leave a job. It’s important to consider this when looking at month-to-month changes, compared with the usual seasonal pattern. The only other fall in employment in 2023 was in April, which also included school holidays.”

However, the ABS’ figure supports professional services firm KPMG's latest Australia Economic Outlook: Q2 2023 summary of the nation's economic position, as well as their previous forecast released in April.

“Australia’s labour market is expected to weaken, with the unemployment rate pushing up from its current low level of 3.6 percent to high-4 percent range by end of 2024,” according to KPMG's latest quarterly report.

In June, incoming RBA governor Michele Bullock indicated that the unemployment rate would need to reach approximately 4.5% in order to strike a better balance between supply and demand for labour. The RBA currently projects this will occur by the end of 2024.

“Our goal is to return the labour market (and the market for goods and services) back to a level consistent with full employment - something like the endpoint in our forecasts,” Ms Bullock said.

Australia’s unemployment rate has remained relatively consistent for the past 12 months, hovering around 3.5% since August 2022. Considering the slight uptick reported in July, but recognising the implied volatility generated by school holidays, the RBA may consider raising or holding the cash rate next month in order to push unemployment higher towards where it needs to be.

The ABS' monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to July 2023. This means that the pace of annual inflation has slowed, when compared to the 5.4% rate reported in June's monthly release. July’s result was also significantly lower than the quarterly figure for June, which was a flat 6.0%.

However, July’s contracted inflation number was somewhat undermined by price declines in fuel and fruit and veggies. These items are considered volatile and it can be helpful to exclude them from the headline CPI indicator to provide a more accurate view of underlying inflation.

"When excluding these volatile items, the decline in annual inflation is more modest at 5.8 percent in July, compared to 6.1 percent in June," ABS head of prices statistics Michelle Marquardt said.

In April, following three straight months of decline, volatile price movements caused headline inflation to jump unexpectedly. May's monthly indicator saw the pace of inflation return to its downward trend and it's been diminishing ever since. These statistical irregularities demonstrate the usefulness of the monthly data series.

It's important to note that this relatively new monthly series is supplemental to the more authoritative quarterly CPI figures. The next quarterly data drop isn’t scheduled until late October.

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. Despite this, the continued decrease in headline inflation could encourage the RBA Board to keep rates on hold in September.

The latest ABS figures for the June quarter 2023, revealed that the Wage Price Index (WPI) rose 0.8% during the second quarter of 2023. Annually, wage growth eased slightly from the 3.7% recorded in March to 3.6% for the year to June.

“Compared to a year ago, fewer jobs had wage increases this quarter, however, on average, the increases received were higher. In particular, the share of jobs which received increases above 3 per cent was the highest for a June quarter since 2012,” ABS head of prices statistics Michelle Marquardt said.

Considering these increases are still below the inflation rate and it doesn’t seem likely that wage increases have negatively affected inflation, the RBA may be inclined to hold the cash rate in September.

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 hovered around $0.66 in late June 2023 before peaking around $0.69 in mid-July. Since then, the currency pair has been on a downward tear, sinking as low as $0.63 around the middle of August. It‘s currently challenging the resistance level of $0.65 but there’s no guarantee that it will break through.

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 raise rates or keep them on hold next month.

Last month, we correctly predicted that Australia’s central bank would hold rates steady in August.

The key economic indicators examined above are influential in determining the cash rate at each Board meeting.

“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.

What's our prediction? Analysing the latest data affecting the upcoming decision, it seems reasonably likely that the RBA will leave the cash rate unchanged at 4.10% on Tuesday 5 September, 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.