Key points

  • Locally, the focus this week was on the RBA raising the cash rate by 25 basis points to 3.35% and a hawkish tilt in the Board’s communication.
  • Next week, the labour force survey will garner the most attention in Australia as well as Governor Lowe’s two appearances before parliamentary committees.
  • Offshore, inflation numbers in the US and UK will be of note.

It was a consequential week domestically with the RBA raising the cash rate target by 25 basis points to 3.35% on Tuesday. The move was widely expected by the market, including by us. The Governor’s statement took a hawkish tilt by removing the line that the Board ‘is not on a pre-set path’. Further, the statement noted that the ‘Board expects that further increases in interest rates will be needed over the months ahead’. This communication was strong enough for us to include two further 25 basis point hikes in March and April in our base cash rate profile. It is apparent that the upside surprise on Q4 2022 core inflation caused the Board to conclude they needed to send a hawkish message. 

To read a more detailed explanation on the RBA’s decision and its implications for our monetary policy outlook, please see here for a note from Head of Australian Economics, Gareth Aird. The RBA’s Statement of Monetary Policy was released earlier today and reaffirmed the Governor’s Statement, though the language was perhaps not as sharp. See here for further details on this, and our assessment of the updated forecasts.

Earlier in the week, retail trade volumes contracted by 0.2%/qtr for Q4 2022. This was the first quarterly fall in over a year. Crucially, retail volumes excluding food fell by 1.6% in the quarter. The shift of spending from goods to services likely contributed to the soft result, but increasing cost of living pressures in light of high inflation and rising interest rates is also a factor. The December trade balance also printed with the surplus falling to A$12.2bn. See here for further detail.

Next week, most of the attention domestically will be on the January labour force survey. The RBA will be watching developments in the labour market closely to determine the impact of their tightening on the demand for labour. The labour market remains extremely tight, though it is likely a turning point has been reached in terms of labour demand. Measures of job vacancies are off their peak and with large migration inflows in the pipeline, more slack in the labour market is likely to come through during 2023. Vacancies do remain elevated and we think labour market will remain strong over coming months. Trend employment growth is edging lower but is likely to remain solid in the near term. As such, we forecast a 25k increase in January. Provided the participation rate remains steady, we expect the unemployment rate to be flat at 3.5%.

Also out next week in Australia is the Westpac-Melbourne Institute Consumer Sentiment index and the NAB Business Survey. As we have been noting for some time, consumer sentiment has been depressed for a long period of time. It was in February last year that the index first indicated there were more pessimistic than optimistic responses (index sub 100). As inflation rose through 2022 and the RBA commenced its rapid monetary tightening, sentiment fell to levels associated with major economic disruptions. The index fell to a cyclical low of 78.0 in November 2022 before rising in both December 2022 in the first month of 2023. Last month’s solid rise (+5.0% to 84.3) was largely attributed to the RBA not meeting during January and so there was a break in the cycle. Given the more hawkish messaging from the RBA in February, consumers may pare back some of their increased optimism. Despite the very low levels of sentiment, economic activity has remained robust. As such, business conditions has remained above the long term average. Conditions recorded a solid fall in December and will likely push lower during this year as financial conditions tighten. Business confidence, which had been more resilient than consumer confidence, is now also negative as businesses concerns about the economic outlook increases.

Across the ditch, there is a raft of economic data being released in NZ next week. See inside for ASB’s expectations for these releases. Further offshore, January 2023 CPI in the US will garner attention. The Fed continues its hawkish stance despite annual inflation appearing to have peaked. Our international economics team forecast headline inflation to ease to 6.1%/yr. Also in the US, we anticipate a rebound in retail sales for January after a soft result in December. In the UK, annual headline CPI is anticipated to remain in double digits and the unemployment rate to stay at 3.7%. In Japan, we forecast GDP to have increased modestly in Q4, up 0.3%/qtr. Our full set of our updated economics forecasts as well as full previews and forecasts are contained inside.

Read the full report

CBA’s Global Economic and Markets Research (GEMR) team publishes a wide range of economic and financial research each week covering the latest data, trends, policy developments and topical issues in Australia and other major economies. To access these publications please visit the GEMR website.

Our Economic Expert

Harry Otley is an Associate Economist at the Commonwealth Bank. He holds a Bachelor of Commerce (Economics) and Bachelor of Psychological Science from the University of Wollongong. After completing the NSW Government Graduate program at NSW Treasury, Harry spent a year in the Macroeconomics team within Treasury where he analysed the NSW and Australian economies and assisted with formulating economic forecasts.