Can the RBA make sense of this fractured nation?

The economic signals are all over the place for a nation in transition. No wonder the central bank is keeping its interest-rate options open.

Retail sales have been flat across the country but savvy shoppers still have an eye out for bargains. Picture: NCA NewsWire / Damian Shaw

Australia is a splintered nation, with 27 million economic actors moving in all directions, depending on their age, indebtedness, income and location. Persistent inflation is hurting everyone, especially the poor. To curb price growth, higher interest rates have drawn a sharp generational line between boomers’ pleasure and millennials’ pain.

This dispersion is not new, as we’ve had several two-nation and three-nation episodes, where communities experience different fortunes. Witness the mining booms in the frontier states and the fallout from state bank implosions a generation ago in Victoria and South Australia.

But such variance makes the task of managing the economy more difficult, especially for the Reserve Bank, which is travelling an ever narrowing road to financial salvation and trying to tell a credible story about its actions.

Many people are experiencing an extra chilly and bleak midwinter down south. Home prices have actually fallen since the start of the year in Melbourne and are barely in positive growth territory in Hobart and Canberra.

Reserve Bank Governor Michele Bullock. Picture: NewsWire / Nikki Short

Yet out in the wealthy West, life looks best for homeowners after a 24 per cent rise in Perth property values over the past 12 months. Rampant population growth, and non-responsive supply, is supercharging the market.

West Australians, and their ­royalty-rich state government, are cashed up. They clearly don’t need the GST distribution tilted their way, but they’ll take the money and are finding ways to spend it.

The ANZ Bank’s “Stateometer” shows state and territory economies “moving through the current cycle at different speeds and facing various pressure points”. WA with its low jobless rate and strong business investment is the only province operating above trend and accelerating on the ANZ metrics.

Add into the mix a range of loose fiscal responses – from the pre-election cash splashes on energy bill relief and public transport in Queensland and WA, to the tipsy deficit drift in NSW – and you get a picture of governments trying to ease the squeeze on voters. The sunshine state’s Treasury forecasts inflation to fall to 2 per cent by the end of this financial year. The fix is in. Rates cuts now!

The national economy is really a series of big city, regional town and rural and remote economies, booming, busting and muddling through. The latest national accounts show an economy treading water in the first three months of the year. Consumer spending is running behind population growth. Per capita output has fallen for five quarters in a row. Living standards are being choked by interest costs, taxes and high prices.

Those in their 30s and 40s, raising children and in the forward half of big mortgages are most likely to be telling pollsters cost of living is their top concern for government action. Annual living cost growth for employee households is 6.5 per cent and 3.4 per cent for self-funded retirees; the headline inflation rate is 3.6 per cent.

RBA assistant governor Christopher Kent says higher rates and inflation are putting a “painful squeeze” on families and businesses. “While households with mortgages are significantly affected, and quite directly, consumption growth is weak for most people,” Kent said last week. “Smaller businesses, and businesses with higher leverage, are also facing financial pressures, much more so than many larger businesses.”

The dilemma for the central bank, one of several at the moment, is while its policy is “restrictive” it may not be biting enough to quell demand to see inflation return to the target band in a reasonable ­period of time. The jobless rate is a stunning 4 per cent and employers are likely to trim workers’ hours rather than lay off staff (post-pandemic shortages are front of mind). The market is tight.

The national trend in retail sales is flat, although the Australian Bureau of Statistics noted this week shoppers can spot a bargain a mile off. ABS head of business statistics Robert Ewing said retail turnover was boosted in May “by watchful shoppers taking advantage of early end-of-financial year promotions and sales events”.

The national trend in retail sales is flat. Picture: NCA Newswire/Gaye Gerard

Commonwealth Bank head of Australian economics Gareth Aird says “shoppers are savvy, cautious and price sensitive”. Right now, families are more tactical than usual in purchasing discretionary items. “This is rational behaviour from a household sector that is stretched,” Aird wrote this week.

Yet not all Australians are “under the pump”, as Jim Chalmers often empathises. Some are merrily strutting through the retail carnage and seeing the value of homes and nest eggs rise. The total stock of household wealth – homes and land, superannuation, bank deposits and shares – has grown for the past six quarters.

According to CoreLogic, in the year to June, housing prices have increased by more than 15 per cent in Brisbane and Adelaide, or double the national capital-city average. Sydney still has the most expensive real estate, but prices over the past year rose by 6 per cent.

Challenger chief economist Jonathan Kearns tells Inquirer the RBA’s aggressive tightening (from 0.1 per cent to 4.35 per cent over the 18 months to last November) has put many homeowners in a “perilous situation”, forcing them to trim consumption and work longer hours to make ends meet. Some borrowers who took advantage of ultra-low fixed rates and eventually faced the so-called “mortgage cliff” when their loans rolled over, have had to sell homes.

But for others, higher interest rates are not a problem; they’re ­borrowing more. Since early 2023 there has been a pick-up in housing loan commitments and housing credit growth. In a note on Thursday, Kearns argued stronger housing credit growth can both drive and result from higher growth of housing prices.

“The strength in the housing market is also evident in other metrics,” he said. “The time taken to sell remains low, although it has picked up a little lately, while vendors have been providing smaller discounts relative to their asking price.”

Kearns, a former senior central bank official, said the strength in the housing market doesn’t help the RBA’s efforts to slow inflation: “Households feel richer with higher housing prices which induces additional spending, while some existing homeowners will be able to increase their borrowing to finance consumption using their expanded housing equity.”

Perhaps, the one piece of “good” news for the RBA is that housing price growth has not been associated with a rise in housing turnover, as usually occurs. “Higher turnover fuels spending, not only on real estate agents, lawyers, removalists, but also those imperative trips to Bunnings to fix up your old home, and then to fix all the repairs of the previous owner of your new home,” Kearns wrote.

But there are forces pulling in the other way, such as tax cuts, energy rebates and governments’ budget stimulus, with more public servants and large capital works projects. That will help families but is likely to mean the first cut in interest rates won’t happen until late this year or early next, at best.

In its June meeting minutes, the RBA board shrugged its shoulders about the strength of consumer spending: overseas travel was stronger than previously thought, the savings rate had fallen and there was more money in mortgage offset accounts. Could be a sign of splashing out or bunkering down or both. Different strokes for different folks. What to do?

Westpac chief economist Luci Ellis argues several of the developments mentioned in the RBA minutes “highlight the awkwardness of the current policy environment”. “This is not a situation of needing to lean against strong private sector demand that is driving inflation higher,” she said.

“Rather, we see weak demand and declining inflation. The policy decision therefore rests on views on whether demand is weak enough to bring inflation down fast enough, given the factors working in the wrong direction.”

The RBA is trying to explain its actions to a public that lived through the era of cheap money when inflation was stubbornly low after the Great Financial Crisis. Then, like other central banks, it completely missed the big inflation and botched its forward guidance about interest rates remaining at near-zero. That recent episode damaged the RBA’s reputation.

Michele Bullock’s crew is operating out of its technical comfort zone and searching for a form of words that maintains public confidence. As the Bank for International Settlements warned this week, central banks have “had to address a dangerous expectations gap between what they can deliver and what they are expected to deliver”.

“This challenge will also be a ­defining one in the years ahead,” the BIS said in its annual report.

Uncertainty, competing theories, a break from history, sticky ­inflation and a fractured nation in transition. No wonder the RBA is keeping its options open and its eyes on the data, with their imperfect signals, prone to big revisions, amid ever-present political traps.