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Softer inflation data may mean rates peak soon, economists say
Following a drop in retail sales in October, speculation is building that official interest rates are close to peaking, with pressure coming off inflation given lower oil and petrol prices and higher rates cutting retail spending.
The Reserve Bank of Australia (RBA) increased the cash rate for the seventh month in November. Since interest rate rises began in May, the big banks have raised mortgage interest rates which, along with rising inflation, has dramatically pushed up the cost of living this year.
There could be, however, good news on the horizon, with economists predicting mortgage rates may be close to peaking. Craig James, chief economist at CommSec, said soft retail sales in October indicate that the rate rises are helping to curb consumer spending, which will eventually help to take pressure off inflation.
“Reserve Bank of Australia Governor Philip Lowe has made it clear that consumer spending trends will be watched closely as a guide to future monetary policy decisions. In that respect, it is worth highlighting that retail trade fell for the first time in 2022 in October,” James said.
“Data suggests that Black Friday sales were softer than expected,” he added. “If the easing in retail spending continues, the chances will lift for the Reserve Bank to pause in its rate hiking cycle in February 2023.”
Commonwealth Bank of Australia’s internal credit and debit card spending data to November 25 indicates there was a seasonal pickup in spending activity due to the Black Friday sales event. However, spending growth in some other discretionary categories, such as eating and drinking out, eased further, indicating higher rates are affecting consumer spending.
This is backed up by data from the Australian Bureau of Statistics (ABS). Australian retail turnover fell 0.2 per cent in October 2022, ending a run of nine straight monthly rises. This suggests “increased cost-of-living pressures including interest rate rises have started to weigh on consumer spending”, said Ben Dorber, head of retail statistics at the ABS.
“Turnover fell in all industries in October except for food retailing, which rose 0.4 per cent, boosted by flood-related spending in parts of Australia and continued high food prices,” he said.
Sales at department stores fell for the second consecutive month, down 2.4 per cent in October, followed by clothing, footwear and personal accessory retailing, down 0.6 per cent. Household goods retailing fell for the second consecutive month, down 0.5 per cent, the fifth fall in the last seven months. Cafes, restaurants and takeaway food services recorded their first fall since January 2022, down 0.4 per cent.
Diana Mousina, senior economist at AMP Capital (pictured), also expects inflation to reverse course next year and official interest rates to peak at 3.1 per cent.
“Interest rates are rising, which is increasing debt service costs and reducing household spending power,” Mousina said. “For a household with a mortgage (around a third of the population), housing interest payments as a share of income will at least double (to over 8 per cent from 4.3 per cent of income) if the cash rate reaches 3.1 per cent, which is our expectation.”
She added: “We expect another 0.25 per cent rate hike from the RBA at its December meeting next week, which would take the cash rate to 3.1 per cent, from 2.85 per cent. While we think this will mark the end of the current rate-hiking cycle, the high inflation environment could persuade the Reserve Bank to do another one or two interest rate hikes in early 2023 (the RBA doesn’t meet in January). But either way, we are getting very close to the end of this current monetary tightening cycle.”
In addition, some of the hottest impacts of high interest rates may yet to be felt given that a “larger-than-normal share of households fixed their mortgages in recent years as fixed rates collapsed. The majority of these fixed-rate borrowers roll off in the second half of 2023 and could be facing mortgage rates of 2.5 or 3 times their initial fixed rate,” Mousina said.
She added that higher household debt levels in Australia mean monetary policy is more potent than it was in the 1970s when household debt was low. However, it will probably still require higher and more variable interest rates than we saw pre-pandemic.
