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The largest fall in spending on goods including clothing, footwear and home furnishings since the start of the Delta wave of the pandemic has bolstered the case for the Reserve Bank to hold interest rates steady for a third consecutive month.
Outgoing RBA governor Philip Lowe will on Tuesday helm his last meeting of the board, which is widely expected by economists to keep the official cash rate at 4.1 per cent as the economy continues to show signs of slowing and inflation pressures ease.
Households have continued to pull back on spending for non-essentials as inflation and interest rates bite.Credit: Nick Moir
AMP deputy chief economist Diana Mousina said there was no solid reason for the Reserve Bank to raise the cash rate on Tuesday after holding it steady for the past two months.
“If we look at all the data that’s come out since the last meeting – wages growth has been softer, the unemployment rate’s gone up, inflation is coming down quicker than the Reserve Bank had been expecting, consumer spending is soft and retail volumes have been declining since December,” she said.
“There is no argument right now that could push you towards another rate hike if the Reserve has already been on hold for two months, so I think the chance of a hike tomorrow is pretty low.”
Monthly inflation figures from the Australian Bureau of Statistics last week showed inflation continuing to ease from the December peak of 8.4 per cent, down to 4.9 per cent in July.
Separate figures show households have continued to rein in spending as the RBA’s earlier rate rises continue to take effect.
Household spending was 0.7 per cent lower in July, compared to July last year, according to ABS figures.
ABS head of business statistics Robert Ewing said the spending indicator’s fall was its first since February 2021 as households cut spending in the face of higher rates and inflation.
“Spending on discretionary goods and services was down for the fourth straight month. It fell 3.3 per cent over the year, as households adapt to cost-of-living pressures,” Ewing said.
“Non-discretionary spending rose 1.7 per cent, which is the lowest growth rate since early 2021.”
Spending on goods fell by 4.1 per cent, the largest decline since July 2021 when the Delta wave of the pandemic was beginning.
The recent fall was driven by a drop in spending on furnishings and household equipment (down 7.9 per cent), clothing and footwear (down 7.5 per cent) and recreation and culture (down 3.9 per cent).
Services spending rose by 2.4 per cent over the year, driven in part by an increase in spending on health services, which were up by 6 per cent.
KPMG chief economist Brendan Rynne said the spending figures, added to other recent data, showing the economy was slowing as the Reserve Bank expected.
“It’s another point that suggests the RBA absolutely should be pausing its rates,” he said.
The full impact of the bank’s earlier rate rises was yet to be felt, and there were also a decreasing number of households on ultra-low fixed-rate mortgages that were yet to roll onto higher variable rates, Rynne said.
Those households had so far been mostly shielded from the effects of the interest rate rises, so there would be more pain to come.
“Unfortunately, as a nation, we’re going to experience a bit more economic pain over the next nine to 12 months,” Rynne said.
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