Rate rise will likely dampen consumer confidence

RBA chief Philip Lowe said global factors explain much of the high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role in the bank’s decision to raise interest rates to 3.1 per cent.

“Returning inflation to target requires a more sustainable balance between demand and supply,” he said.

Mr Lowe said the cost of living was expected to continue to grow, hitting 8 per cent before dropping next year.

He also said interest rates are expected to continue rising next year.

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” he said.

Ms Thompson said the decision to further raise the cash rate will place undeniable financial pressure on Australian households.

“Combined with the Budget’s forecast rising prices on everyday goods, housing and energy, and lacklustre wages growth, this latest increase in the cash rate all but guarantees consumer confidence will weaken as we enter the busy Christmas retail period,” she said.

Ms Thompson said data and forecasts released in the latter half of October all pointed to difficult economic conditions in 2023.

“The RBA board will likely have carefully considered labour force data, which showed that the unemployment rate has stagnated at 3.5 per cent, employment growth has slowed dramatically, and job vacancies have stopped rising,” she said.

“Data from employment marketplace SEEK also points to a slowdown in jobs growth, with job ads declining month on month for four months now, and by a 5.2 per cent over September 2022, the largest decline all year.

“And in a sign that increasing migration is starting to help employers fill more roles, there was a 10.3 per cent increase in applications for job ads month on month, the greatest rise since April 2020.”

She predicted that as all signs are pointing to a weakening economy, that the RBA will take slower steps in tightening monetary policy as it tries to avoid sending Australia into recession.

“Despite continuing very strong Business Sentiment, CreditorWatch data reveals businesses are starting to feel more financial pressure, with B2B trade defaults and court actions rising on a trend basis,” she said.