Why rates limbo might soon end

Dismal retail sales data would usually lead to widespread speculation of an interest rate cut at the mid-June meeting. But not this time. Here’s why.

When allowance is made for inflation, retail sales have fallen around 3-4 per cent over the past year.

At almost any other time in the 34-year history of the ‘modern’ Reserve Bank, the dismal retail sales data we saw Tuesday would have led to widespread, if not indeed universal, speculation of an interest-rate cut at the mid-June meeting.

Further, the RBA would almost as certainly have delivered on that expectation.

But not in 2024. Indeed, it’s only three weeks since the RBA’s last meeting when it – at least, hypothetically – discussed hiking its official rate.

And not much-to-nothing has changed on the retail sales – or indeed, broader consumer spending - front since then.

Retail sales haven’t just stood still – in actual dollar terms, that is; in real after-inflation terms, they’ve gone backwards – over the last year.

They’ve actually been stagnant since late 2022, after the ‘coming out of Covid lockdowns’ surge through 2022.

The dismal retail sales data we saw Tuesday would usually have led to widespread, if not indeed universal, speculation of an interest-rate cut at the mid-June meeting.

When allowance is made for inflation, retail sales have fallen by around 3-4 per cent over the past year.

When further allowance is made for our extraordinary immigration-driven near-3 per cent population growth, real per capita sales have fallen by closer to 6 per cent.

Retail sales are usually a very good indicator of overall consumer spending; and consumer spending adds to nearly 70 per cent of the economy.

That would normally be signalling – indeed, statistically shrieking – recession with a capital-R.

And cause the RBA to cut, maybe even think of slashing, rates; because, apart from anything else, the RBA could be confident that consequent inflation would fall and fall sharply.

None of that holds true now.

We no longer live in normal times. The politicians made certain of that through Covid. And made the RBA’s job that much harder.

‘I have a sense that we very close to a tipping point’

Even apart from pollies and Covid, normal patterns have been thoroughly disrupted.

Retail sales are seriously down; but not so broader consumer spending, which remains sluggishly positive, in real terms; and households are sitting on a total $1.5tr cash board.

The central dilemma for the RBA remains: does it hike RBNZ-style to really crush inflation (sand the economy); or does it cut into now, slowly, and maybe about to get faster, rising unemployment?

Self-evidently, since December, governor Michele Bullock has led the board to sit on its hands – clinging to the ‘’narrow path” initiated by her predecessor Philip Lowe.

Despite the strong language in the formal minutes, revealed last week, there was never any real prospect of a hike three weeks ago.

That would have meant committing to exit ‘the path’. When Bullock has said explicitly that she and the board fully tolerate taking until the end of next year to get inflation below 3 per cent.

To remind everyone, that’s fully 18 months away. That sort of slowly-slowly is clearly, and explicitly, intolerable to its central bank cousin across the Tasman.

Nevertheless, I have a sense that we very close to a tipping point.

One or more of inflation, wages or jobless will crack over the next four-to-six weeks, demanding the RBA choose: hike or cut.

The same applies, I suggest, to the Fed. And that will in turn break Wall St – and our market – out of the current, relatively recent, uneasy limbo.

Originally published as Why rates limbo might soon end