20%-Off at Merivale yet to influence RBA economists
I think it’s fair to say anyone with a mortgage or business loan would like to see some relief at the Reserve Bank of Australia (RBA) bowser. While rate cuts benefit those with loans, with real estate, and mortgages, rate cuts could push real estate prices up, further hindering those who are already validly complaining about affordability.
Speaking about affordability, I am sure there are plenty of RBA economists and analysts who dine at drink at Merivale establishments down the other end of Martin Place.
This week, the entertainment and dining juggernaut Merivale, owned by Justin Hemmes, slapped “Merivale 20% off everything” tapes across the windows of Bar Totti’s and its falafel joint on George Street here in Sydney. Not only does it speak to the margins the organisation must have been earning previously, but also that conditions are really getting tough. And I am sure those RBA execs have noticed – they’re always lunching at Mr. Wong.
Figure 1. Merivale, George Street, Sydney offering 20 per cent everything
In the absence of rate cuts, the RBA’s decision to do nothing might have some positives.
This week, the RBA decided to keep the cash rate steady at 4.35 per cent, marking the fifth consecutive time rates have remained unchanged. This extended period of stability is the longest since early 2022, and if it provides any positives, it may be that it offers homeowners some predictability.
But that’s about it.
RBA Governor Michele Bullock confirmed the decision following the June meeting, further confounding those economists who, earlier this year, were predicting rate cuts.
Persistent above-target inflation continues to make rate cuts unlikely, and the RBA’s own projections suggest it’s a reasonable bet rates will remain where they are until the end of the year.
Nevertheless, there are always those that remain optimistic. One report noted Ray White’s Chief Economist, Nerida Conisbee, pointing to Sweden, where the central bank recently cut rates from 4 per cent to 3.75 per cent, even with inflation above target. That Australia follows Sweden is clearly a long bow to draw unless we have a recession, and even then, if inflation persists, the RBA may be reluctant to stimulate.
Meanwhile, the RBA is also likely to closely watch the impact of the government’s forthcoming stage-3 tax cuts (even though significantly less than promised by the former liberal government).
On balance, the RBA’s own predictions, which incorporate present inflation volatility (in April, inflation rose slightly), are that inflation might stabilise or rise slightly. This is the RBA communicating it is not presently entertaining rate cuts any time soon.
The RBA’s recent statement does underscore uncertainty in the economic outlook. That’s not new. When is economic forecasting ever easy? Inflation is falling slower than expected and the central forecast is inflation won’t return to the 2-3 per cent target range until the second half of 2025, hitting the midpoint by 2026.
If only it was that predictable! By 2026, China could blockade Taiwan (Xi wants his military ready for a 2027 invasion), market volatility could go wild, a run on cash could ensue as the media ponders nuclear escalation and the RBA’s current forecasts become a relic from a more peaceful time. I am not predicting any of that by the way. The point is nothing is predictable.
With economic momentum currently anaemic, gross domestic product (GDP) growth slow, unemployment rising, and wage growth sluggish, the presence of persistent is perplexing, and the path for future interest rates unknowable.
Unsurprisingly, the RBA remains non-committal, acknowledging the risks to inflation still lean to the upside, but the sale at Merivale suggests the economy is seriously slowing, with diners zipping up their wallets. Perhaps the most important thing to keep in mind is that the RBA remains “data-driven”. It will respond to what the data shows.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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