Interest Rate Rise ‘Cannot be Justified’: Deloitte

People shop for fresh produce at the Queen Victoria Market in Melbourne on July 4, 2023, after the Reserve Bank of Australia (RBA) surprised analysts by leaving interest rates on hold at 4.1 per cent in July. (William West/AFP via Getty Images)

Senior economists have raised alarm bells about any further interest rate rises, warning it could crush business and household confidence.

Deloitte Access Economics Partner Stephen Smith said any further increase in interest rates “cannot be justified” and would “pull the rug out from under a cautious economic recovery.”

“Should rates stay on hold, the narrative of a strengthening Australian economy through the second half of 2024 would remain intact,” Mr. Smith said.

Inflation data for the June 24 quarter is set to be released by the Australian Bureau of Statistics (ABS) on July 31.

Mr. Smith outlined how two possible strategies from the RBA could result in completely different economic trajectories in the year ahead.

He said down one road, high inflation in the June quarter result may force the hand of the RBA to lift interest rates in early August.

In his view, this would further crush household and business confidence and wipe out the benefits of tax cuts and real wage gains in the second half of 2024.

Down the other road, Mr. Smith said the June quarter inflation result could be more benign, consistent with the slower pace of growth in the Australian economy.

“That would see the RBA hold interest rates steady again next month, enabling households to lead a steady recovery in economic growth in 2024-25,” he said.

“Deloitte Access Economics’ forecasts most closely resemble the second road.”

Co-author and Deloitte Access Economics partner Cathryn Lee agreed with Mr. Smith that interest rates should remain unchanged.

“We believe interest rates neither will, nor should, increase from current levels—and that has been our consistent view for some time, for several reasons,” she said.

Ms. Lee argued that interest rates at their current level are restrictive. She also highlighted that inflation is retreating towards the target, although not as quickly as hoped.

She added that further interest rate rises are unlikely to temper price growth any more meaningfully than otherwise.

“And finally, the surge of post-pandemic inflation hit Australia later than it hit other economies and has therefore cooled earlier elsewhere as well,” she said.

“That has enabled short-term interest rates to be cut in several economies while the prospect of lower policy rates in the United States and New Zealand has also strengthened notably in recent weeks.”

Reserve Bank of Australia to Meet

The RBA will meet on August 6 to review monetary policy, including a decision on interest rates.

Currently, the official cash rate is 4.35 percent. March Consumer Price Index (CPI) data showed a 3.6 percent rise in inflation year-on-year. The RBA has consistently emphasised its goal of keeping consumer price inflation at two to three percent.

Meanwhile, Westpac Group chief economist Luci Ellis noted that disinflation has resumed in the United States, Canada, and New Zealand.

“Expectations of near-term cuts in policy rates have therefore come back into the frame in the United States and New Zealand; the Bank of Canada has already started cutting, as have the European Central Bank and several other European central banks,” she said in a July 22 update (pdf).

She noted the logic behind these central banks, explaining that tight policy can not last forever, and “because monetary policy affects inflation with a lag, the rate-cutting phase needs to start before inflation has reached target.”

Ms. Ellis said most private sector forecasters expect inflation in Australia to decline to the two to three percent target range at a pace similar to the RBA’s forecasts, although there are outliers.

“Anyone arguing that the RBA is a long way from cutting would need to show why Australia would not follow the same broad disinflation trend as its peers,” she said.

She noted that Australia opened up later after the COVID-19 pandemic than most other advanced economies, so it saw a surge in inflation later.

“The RBA is also deliberately choosing a ‘not quite as high for a bit longer’ strategy to hold onto the gains made in getting unemployment down,” she added.

“So there is good reason to expect the RBA to be among the last of the advanced economy central banks to start cutting rates.”

National Australia Bank forecasts that the RBA will keep interest rates on hold for the rest of the year.