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Surprise spending dip locks in rate pause: CBA

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By Charbel Kadib
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4 minute read

A sharper-than-expected fall in retail spending is “just what the Reserve Bank wants to see” ahead of its next monetary policy board meeting, according to the Commonwealth Bank.

Retail sales were flat in April at $35.2 billion, the latest data from the Australian Bureau of Statistics (ABS) has revealed — below market expectations of a 0.3 per cent rise.

This followed a 0.4 per cent increase in March and a 0.2 per cent rise in February.

Accordingly, in annualised terms, retail sales slowed from an increase of 5.4 per cent in March to 4.2 per cent in the 12 months to 30 April, 2023.

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On a state-by-state basis, retail sales declined sharpest in Tasmania (1.5 per cent), NSW (0.4 per cent), and Victoria (0.1 per cent).

This was offset by increases in Western Australia (1 per cent), South Australia (0.6 per cent), and Queensland (0.1 per cent).

Ben Dorber, ABS’ head of retail statistics, attributed weaker retail spending to shifting consumer behaviour off the back of aggressive monetary policy tightening from the Reserve Bank of Australia (RBA).

“Retail turnover has plateaued over the last six months as consumers spent less on discretionary goods in response to cost-of-living pressures and rising interest rates,” Mr Dorber said.

Offsetting the slowdown was an increase in spending on clothing, footwear, and personal accessory retailing (1.9 per cent), which Mr Dorber said was a response to cooling temperatures.

Reflecting on the latest retail sales figures, the Commonwealth Bank (CBA) said the weaker-than-expected dip would be welcomed by the RBA.

“The responses by Aussie consumers are just what the Reserve Bank wants to see. And expect to see greater resistance by retailers on any price increases sought by suppliers,” chief economist Craig James said.

CBA’s Stephen Wu said the RBA would likely pause its hiking cycle at the next monetary policy board meeting after resuming it in May.

“The run of weak economic data means we do not expect a rate hike at the June RBA board meeting,” he added.

“Looking ahead, we see consumer spending growth slowing further from here.

“The rate hikes delivered by the RBA this year are yet to fully flow through to variable rate mortgage repayments, given the well‑known lags.”

AMP Capital’s chief economist, Shane Oliver, agrees but warned the RBA may yet hike given “continuing hawkish commentary”, as well as wage growth risks and rising house prices.

“The problem is that we are now seeing clear evidence that rate hikes are slowing the economy — with falling real retail sales, falling building approvals, slowing business investment plans and early indications of a slowing jobs market,” he observed.

“At the same time, inflation is off its highs and heading down.”

But the lagged effects of previous rate hikes pose a “high and rising danger” the RBA could “end up going too far”, by “focusing too much” on unemployment, inflation, and wage growth.

In minutes from its last monetary policy board meeting, the RBA board noted “further increases” in interest rates “may still be required”.

However, the central bank added a caveat, noting its next move would “depend on how the economy and inflation evolve”.

Thus far, the RBA has increased the cash rate by a cumulative 375 basis points (bps) since commencing its cycle in March 2022.

The cash rate currently sits at 3.85 per cent — CBA’s projected terminal rate.

However, other economists continue to expect one last 25 bps hike, taking the cash rate to 4.1 per cent — 400 bps above its record low of 0.1 per cent.

The next board meeting is scheduled for Tuesday, 6 June.

The RBA’s US counterpart, the Federal Reserve, has also hinted at a pause in its tightening cycle, which has involved a cumulative 500 bps in hikes since early 2022.

Fed chair Jerome Powell told an audience at a conference in Washington on 19 May that the central bank may need more time to assess the “lagged effects” of 500 bps of tightening in just over a year.

“Our guidance is limited to identifying the factors we’ll be monitoring as we assess the extent to which additional policy firming may be appropriate to return inflation to 2 per cent.

“The risks of doing too much or doing too little are becoming more balanced and our policy adjusted to reflect that.”

He said the Federal Open Market Committee is yet to make a determination ahead of its next meeting, scheduled to take place on 13–14 June.

Surprise spending dip locks in rate pause: CBA

A sharper-than-expected fall in retail spending is “just what the Reserve Bank wants to see” ahead of its next monetary policy board meeting, according to the Commonwealth Bank.

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