In terms of the outlook for Australian interest rates, the talk in recent months has all been about the next move being upwards.
Booming employment growth and signs that business investment is picking up, along with strong economic conditions abroad and monetary policy tightening from the US Federal Reserve and Bank of Canada, has seen talk of rate hikes go from a whisper to a roar.
Markets have priced in a rate hike by the end of the June quarter next year. This is the investment community saying: “It’s on.”
Many economists are also warming to that view, with the NAB and ANZ joining the ranks of HSBC and TD Securities in forecasting a rate increase within the next nine months.
However, the talk of rate hikes came to a sudden halt earlier this week following the release of Australia’s retail sales report for August, revealing that spending slumped by 0.6%, the steepest percentage decline since March 2013.
Following a 0.2% slide in July, it reignited simmering concerns over the health of household finances.
The Aussie dollar dropped and interest rate futures strengthened, reflecting renewed doubts over whether the the RBA was truly going to lift interest rates for the first time since late 2010.
It seems they weren’t alone.
In an interview with the Wall Street Journal, current RBA board member Ian Harper said that the bank had not completely ruled out the prospect of delivering another interest rate cut given the risks attached to the household sector.
“While Harper also pointed to positive economic data out recently, including employment and investment figures, his comments suggest the Reserve Bank of Australia will likely remain cautious for longer-than-expected, with the possibility of another rate cut not completely ruled out,” the WSJ wrote.
Harper said that while, in isolation, the slump in retail sales over the past two months was no cause for immediate alarm, a policy response could be warranted if consumption across the economy loses momentum entirely.
“The thing that is causing an issue for us [the RBA board] is slow growth in wages, which is feeding into slow growth in household income,” Harper said. “If you start to lose that momentum, that might be the basis of some sort of policy action.”
Harper said the August retail sales report was “yet another indication that we are not out of the woods”, adding that “household debt is reaching its upper limits, while there are also limitations on how much people can rein in saving to sustain their spending”.
He also stressed that weakness in retail sales was one part of household consumption, with the remainder — around 70% — coming from spending on services.
Based on recent indications, he said that total consumption had been growing at a “respectable pace”.
More broadly, he said that trends in the economy have been positive of late, with employment lifting in all states, even in depressed mining regions, while the outlook for investment is looking brighter.
However, counteracting that those positives, he added that the current level of the Australian dollar was an inhibitor to growth, even after its recent falls.
Harper described progress on Australia’s economic recovery as “painfully slow”, noting there were no signs of inflation or strong wage growth despite employment growth and a pickup in investment, according to the Journal.
“You wouldn’t want to be jumping the gun and tightening too quickly,” he said.
Harper’s intervention in the interest rate debate follows an article published earlier this week from former RBA board member John Edwards who suggested that the RBA may decide to lift official interest rates even if inflation was not back within its 2-3% medium term target.
“If output growth is satisfactory the RBA may well begin to tighten — even if inflation is below the target,” Edwards wrote in a blog published on the Lowy Institute website, suggesting that one reason to do so was because “very low interest rates at a time of firm economic expansion invite trouble” when it comes to asset prices and financial stability risks.
“Rates may need to be increased even if inflation is below target,” he said. “There is otherwise too great a risk that the price of assets like houses and shares may get too far out of whack with what prove to be sustainable levels.”