Cliff Notes: staying the course
Key insights from the week that was.
In Australia, the RBA Board left the cash rate unchanged at 4.35%. This decision, following an upside surprise on inflation data and stronger-than-expected labour market data but weaker partials for consumption, highlights the Board’s cautious approach amid volatile data.
The Board is certainly not ignoring incoming information regarding inflation. Refreshed staff projections incorporate recent upside momentum into both the headline and trimmed mean inflation forecasts, the year-end figures revised up from 3.2% and 3.1% to 3.8% and 3.4% respectively. Dec-25 and Jun-26 were unchanged, however. The profile for unemployment is slightly firmer too, Dec-24 and Dec-25 revised down 0.1ppt to 4.2% and 4.3% respectively. The weak state of consumption meanwhile saw year-end GDP revised down from 1.8% to 1.6% for 2024. 2025-26 is unchanged.
As discussed by Chief Economist Luci Ellis in a video update mid-week, we view the Board’s forecasts, language and ultimate decision as striking a delicate balance. Recent data has put the Board back on high alert for further near-term upside risks. But, the Board’s confidence in returning inflation sustainably to target in the medium-term without undue cost to the economy remains. Rate cuts are therefore unlikely to be delivered until late in the year, November being our forecast for the first move, with policy relief ensuing at a measured pace thereafter – 25bp per quarter, taking the cash rate to 3.10% at Q4 2025.
Highlighting the consequence of elevated inflation and rates for the consumer, real retail sales contracted again in Q1, declining –0.4% (–1.3%yr). The modest gain in nominal sales (0.2%) suggests retail prices posted a solid increase (0.6%) despite enduring weakness in sales volumes. Perhaps even more stark, real retail sales have fallen 5.9% since mid-2022 on a per capita basis – a result that stands in stark contrast to most other advanced economies. Alongside other consumption partials for vehicle and fuel sales, this release suggests consumer spending was near flat in Q1.
Next week on May 14, the Federal Government will deliver Budget 2024/25. For more detail, see our preview published earlier this week. For more information on our broader views on the state of the domestic and global economy, our latest Market Outlook will be published today on WestpacIQ.
The international data flow has been relatively quiet this week, leaving last Friday’s US employment and ISM services reports front of mind. Much has already been written about these releases, so we will be brief. Key is that April saw a material step down in the pace of nonfarm payrolls growth, to 175k from 269k per month in the three months to March. Household survey employment was weak again at 25k (having averaged 94k per month in Q1) and average hourly earnings were benign, rising just 0.2%. One month does not make a trend, but the labour market continuing on this path is consistent with US inflation sustainably returning near target.
Ahead, the FOMC will have to scrutinise downside risks for activity and the labour market more closely. Both the ISM surveys, but particularly the services measure, are pointing to outright job losses in coming months. This week’s Senior Loan Officers Survey for April also highlighted that banks continue to tighten standards across most lines of lending. Credit demand from businesses and households was also said to have weakened broadly in the last reporting period.
Turning to the UK, in their May meeting communications, the Bank of England’s MPC made clear a return to target inflation is within sight and consequently that they will likely be able to ease policy soon. Indeed, two members of the MPC voted for a 25bp cut at this meeting and “Conditioned on market interest rates [which include several rate cuts]… CPI inflation is [now] projected to be 1.9% in two years’ time and 1.6% in three years”, below the BoE’s 2.0% medium-term target. Demand has certainly been weaker in the UK than many other developed markets, particularly the US; but this revised projection highlights the success policy makers are having globally in the fight against inflation.
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