The Reserve Bank of Australia will take another cautious step into the unknown at its June policy meeting next week, deliberating on a mixed economic picture of growth barely registering a pulse against a backdrop of still-stubborn inflation risks.
Money markets are now comfortable with the idea that the RBA will delay cutting interest rates from the current 4.35 per cent until well into 2025, with RBA governor Michele Bullock expected to confirm once again on Tuesday that the central bank’s board took time to debate a further interest-rate increase.
Ms Bullock is playing an intelligent game with markets by keeping all options on the table for the RBA in an extremely uncertain economic environment.
That wide-open guidance reflects the RBA’s lack of clarity about how the Australian economy will travel through the remainder of the year.
Slow gains are being made in the war against inflation, but risks remain that the battle could rage on for longer than the RBA feels comfortable with.
The next few weeks will have a big impact on shaping the RBA’s actions for the rest of the year.
The minimum wage will rise by 3.75 per cent from July 1, with the increase occurring simultaneously with the delivery of income tax cuts for all workers and a one-off government handout of $300 for every household to combat rising costs.
It feels like a lot of stimulus is about to hit wallets at a time when the RBA is still warning that interest rates may need to rise further.
Much will depend on whether the added dollars will be saved or spent, with household budgets under a lot of pressure due to soaring mortgage repayments and rising costs in key areas like rents, health insurance and electricity.
Ms Bullock has downplayed the likely impact of the coming stimulus, but that sense of calm will dissipate quickly if inflation in the second quarter serves up another high-side surprise.
Inflation data for the second quarter is due July 31. Monthly data so far have pointed to some risk that price pressures could again deliver a shock.
It’s all adding to the tension for the RBA, which will have precious little room to manoeuvre if inflation reasserts itself.
A further interest-rate increase would probably tip the economy into a recession.
The Australian economy is already flirting with such an outcome, and in per capita terms, it has been in retreat for some time.
A recession might be seen as a policy failure for the RBA, especially if unemployment jumps at the same time.
The narrow policy path before the RBA, which has on one side the need to protect jobs, and on the other the task of quashing inflation, remains incredibly narrow.
Next week’s policy meeting is expected to be straightforward, but it will also be a window into how the RBA is preparing for the still-considerable challenges coming just around the corner.
Dow Jones newswires
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