The eight steps that could persuade the Reserve Bank to lower rates

The Reserve Bank lives or dies on its economic forecasts. But this week’s national accounts suggest the RBA is struggling to accurately measure how consumers are dealing with current interest rates and inflation.

In early August, the RBA released its quarterly outlook on monetary policy and the economy. It contained key forecasts, particularly around households. But this week’s national accounts suggest those forecasts were wrong – by a substantial margin.

The bank believed household consumption, which accounts for more than half of total economic activity, had grown by 1.1 per cent in the year to the end of June. But household spending increased just 0.5 per cent, and actually fell by 0.2 per cent in the June quarter.

Reserve Bank governor Michele Bullock and the rest of her board will be focused on key pieces of the economic jigsaw over coming months.Credit: Dominic Lorrimer

The household savings ratio was just 0.6 per cent in the quarter. The bank, which believed higher savings showed consumers with buffers to deal with higher interest rates, had forecast 1.2 per cent.

And in a substantial misread of the economy, the bank expected real household disposable income – a good indicator of living standards – to be up by 1.1 per cent over the past 12 months. Instead, the national accounts showed it had fallen by 0.3 per cent.

In dollar terms, instead of every Australian holding an extra $200 to spend by the end of June, they had $472 less.

Economists and politicians love to believe the Reserve Bank sets interest rates based on just one single economic indicator. Be it a small lift or fall in the rate of inflation, or a few thousand more people in work, analysts often argue just one rogue 0.1 or 0.2 per cent either way in some data release will change the RBA’s direction.

But bank governor Michele Bullock this week made clear the bank is looking broadly as it weighs up rate settings.

“The board isn’t going to focus on one single number; they are going to focus on the breadth of information they are receiving,” she told an Australian Business Economists lunch in Sydney on Thursday.

The bank has only three more board meetings this year. Key insights into the economy will determine whether official interest rates remain steady at 4.35 per cent or the bank delivers a pre-Christmas surprise of rate relief to millions of mortgage holders.

Bullock, in the speech in which she conceded some people may have to sell their home to stay afloat, admitted the figures showed household consumption had been “a little weaker” than expected.

The tougher situation prompted financial markets to lift their expectations for a rate cut by year’s end.

But the official figures that have proved difficult for the Reserve to forecast also mean there are only limited chances for the bank to consider any change in interest rate settings.

The RBA board’s next meeting is on September 23 and 24, seven weeks after it held the cash rate steady at its August gathering. If the bank were to move from its August position, it would need new data giving an important insight into the economy.

But there are precious few data releases in the coming weeks and only eight of note between now and the mid-December meeting. They cover three jobs reports, two retail sales reports, inflation figures, a wages update and the quarterly national accounts.

Jobs, jobs, jobs

The Australian Bureau of Statistics will release its August jobs report on September 19. Unemployment would have to surge, or nosedive, to prompt the bank to act on this alone.

In terms of statistics that move interest rates, that’s it.

This lack of data is why financial markets put the chance of a rate cut at the September meeting at just 10 per cent, and economists are unanimous in expecting the RBA to sit on its hands.

After September, the RBA board meets on two more occasions this year – November 4-5 and December 9-10.

Consumer price index and retail sales

On the calendar in the Reserve Bank’s Sydney headquarters, there’s a big red circle around October 30.

That is when the September-quarter consumer price index will be released. This will show inflation falling, due in part to government power subsidies that could drive down electricity inflation by as much as 20 per cent.

Combine that with an edge down in petrol prices – and early signs that pressure is finally coming out of the rental market – and inflation is likely to be at its lowest level since mid-2021.

But that inflation data will not be the only issue to consider. By the November meeting, the bank will have also seen two further monthly jobs reports and two measures of retail sales.

Central banks in other parts of the world, including the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of New Zealand, will also have met. All of them may have cut their key lending rates. This would push up the value of the Australian dollar, which is in itself deflationary for the domestic economy.

National accounts and wage growth

Soon after the November meeting, more pieces of the economic jigsaw will be released. These include measures of wage growth, which the bank believes has already started to turn, plus the September-quarter national accounts.

If the national accounts suggest consumers have not gone on a stage 3 tax cut-inspired spending spree, and show the economy continuing to struggle, the bank board then has to make a decision. Does it hold interest rates over Christmas and all the way until its next meeting in February, or does it move?

It’s this run of figures from mid-November through to early December that has some economists believing the Reserve Bank will start cutting interest rates this year.

Even though Bullock has argued a rate cut this year is unlikely, financial markets believe there’s almost a 90 per cent chance of a pre-Christmas rate cut, while a second cut is completely priced in from April.

The political argument over the bank, including Treasurer Jim Chalmers’ comments that interest rates are smashing the economy, will be put to one side by the RBA.

Its focus over the coming months will be on every bit of data it can gather about the state of the economy.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.