Deloitte States Interest Rate Increase “Unjustified”
The Reserve Bank of Australia is scheduled to conduct a monetary policy meeting on August 6.
Senior economists have expressed concerns about potential interest rate hikes, cautioning that it could negatively impact business and household confidence.
Deloitte Access Economics Partner Stephen Smith stated that any further increase in interest rates would be unjustified and could disrupt a fragile economic recovery.
“Should rates remain unchanged, the narrative of a strengthening Australian economy in the second half of 2024 would continue,” Mr. Smith said.
Inflation data for the June quarter is set to be released by the Australian Bureau of Statistics (ABS) on July 31.
Mr. Smith outlined how two potential strategies from the RBA could lead to different economic outcomes in the coming year.
He explained that if high inflation in the June quarter necessitates an interest rate hike in early August, it could negatively impact confidence and negate the benefits of tax cuts and wage increases.
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On the other hand, Mr. Smith suggested that a more favorable inflation outcome in the June quarter, aligning with the slower pace of economic growth, could lead to a steady recovery in 2024-25 if the RBA maintains the current interest rates.
Co-author and Deloitte Access Economics partner Cathryn Lee concurred with Mr. Smith’s view on keeping interest rates stable.
“We believe that interest rates should not be raised from their current levels for several reasons,” she said.
Ms. Lee argued that current interest rates are already restrictive and that inflation is gradually approaching the target range, albeit slower than expected.
She also noted that further interest rate increases are unlikely to significantly impact price growth.
“Additionally, post-pandemic inflation in Australia peaked later than in other economies, allowing for rate cuts in those regions,” she explained.
Reserve Bank of Australia to Meet
The RBA is scheduled to meet on August 6 to review monetary policy decisions, including interest rates.
Currently, the official cash rate stands at 4.35 percent. March Consumer Price Index (CPI) data indicated a 3.6 percent inflation increase year-on-year. The RBA remains focused on maintaining consumer price inflation within the two to three percent target range.
Furthermore, Westpac Group chief economist Luci Ellis highlighted a trend of disinflation in the United States, Canada, and New Zealand.
“Anticipated policy rate cuts have resurfaced in the United States and New Zealand, with the Bank of Canada and European Central Bank already implementing cuts,” she mentioned in a July 22 update (pdf).
She explained the rationale behind these central bank actions, emphasizing that tight policies cannot be sustained indefinitely. She also noted that Australia is expected to follow a similar disinflation trajectory to its peers.
“Given the delayed post-pandemic recovery in Australia, along with the RBA’s strategy of maintaining high employment rates, it is likely that rate cuts will be delayed compared to other advanced economies,” she added.
The National Australia Bank predicts that the RBA will keep interest rates unchanged for the remainder of the year.
