Central Bank backs strong economic recovery, but don’t hold your breath for a rate hike

Central Bank backs strong economic recovery, but don’t hold your breath for a rate hike

Central Bank backs strong economic recovery, but don’t hold your breath for a rate hike

July 16, 2021
Harley Dale

CreditorWatch Chief Economist, Harley Dale's Economic and Business Update for June 2021

The Board of the Reserve Bank of Australia (RBA) made its monthly interest rate decision on Tuesday, 6 July.

The key announcement was that there would be no change to the Official Cash Rate (OCR) and the announcement was almost universally anticipated. But the statement accompanying the decision is significant: the RBA reinforced that the the OCR is not expected to be lifted until 2024.

CreditorWatch has observed considerable speculation that because of growing evidence of a strengthening economy, the RBA may lift rates earlier than that. Some are speculating that the lift could come as early as the end of 2022.

That may well turn out to be the case, but the RBA is providing no indication of that at this stage. That is because they do not expect to see sufficient upward pressure on prices and wages until 2024.

The good news for businesses across all industries is that super low interest rates will remain available for some time yet. This outlook is augmented by the RBA purchasing weekly bonds (albeit at slightly reduced rate) out to April 2024. This is an indicator that downward pressure will be maintained on business and household borrowing costs in coming years.

That is mighty good news because there continues to be widespread differences in business conditions across industries. In a net sense, it is still accurate to say there are more industries in which we need to see considerable improvement, than those that are starting to fire.

Commercial Construction, Healthcare and Social Assistance, and Wholesale Trade represent three examples of industries which still have some way to climb back to what participants would consider to be acceptable performance.

There have been recent reports of considerable COVID related insolvencies in Sydney and Melbourne. CreditorWatch expects most businesses to push through, although the latest lockdowns in Sydney and Melbourne are stark reminders of the economic vulnerability of some industries – hospitality and accommodation in the CBDs and beyond being a prime example.

The uncertainty created by recent lockdowns and Australia’s low vaccination rate are two key uncertainties confronting all businesses. We need to be cognisant of that situation and the fact that some industries are still facing considerable economic challenges. That was always expected to be the case.

What we do also find is that in the middle of this year, the overall Australian economy is in far better shape than was feared would be the case through the majority of 2020. The RBA recognised this in its latest statement and used the labour market as a prominent example. There are now more Australians employed than there were before the pandemic and the unemployment rate is falling faster than initially expected.

A shortage of skilled labour is having an adverse impact on some relatively strongly performing industries, such as Agriculture, Forestry and Fishing. Lockdown impacts notwithstanding, Retail, Accommodation and Food Services are examples of industries doing relatively well although there is a skills shortage in hospitality and tourism.

So where to from here?
The first half of this fresh financial year will be critical, a point CreditorWatch has been making for some time.

We still had JobKeeper in the March 2021 quarter, naturally followed by the first quarter without it. Now we are into the main game. CreditorWatch forecasts that most businesses, across industries, will survive. Some will be scarred, others will have found a way to thrive in the uncertain and volatile economic environment brought by the pandemic, and that will continue for some time yet. Yes, there will be ongoing insolvencies and there will be volatility to that situation, which is never good for any industry. However, we didn’t fall off a cliff, we just need to scrutinise the first half of 2021/22 to ensure there are no cracks nor fragility appearing to risk derailing the overall economic recovery. We don’t know just yet, but if industry performance can become broader-based and most companies push on through from here on in, that will be huge in bolstering the Australian economy.

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