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Retailers are pleading for the Reserve Bank of Australia (RBA) to gift a Christmas rate cut to drive consumer spending in December, but the RBA indicates this won’t be likely.

This week, the RBA held the cash rate steady at 4.35 per cent, despite inflation falling substantially since its peak in 2022. Headline inflation is now at 2.8 per cent according to the Australian Bureau of Statistics, which is within the RBA’s target range of 2-3 per cent.

Australian Retailers Association (ARA) CEO Paul Zahra said retailers continue to battle the dual headwinds of slow spending coupled with higher costs of doing business.

“With CPI at its lowest rate in more than three years, it’s time for the RBA to reduce the pressure on households and businesses by lowering the current cash rate,” Zahra said. 

“Small businesses are particularly vulnerable, with ongoing pressure from many directions including higher business costs across the board.”

Zahra added that with peak season in full swing, a rate cut this week would have given retailers much-needed confidence as they look towards Christmas and the New Year. 

“Many retailers have been investing heavily in Christmas and the holiday season, including additional staff, new product lines and festive store fitouts,” he said.

Meanwhile, National Retail Association (NRA) interim CEO Lindsay Carroll said the retail sector has been wounded by historically sluggish sales in the last couple of years and is in dire need of relief. 

“The Christmas trading period couldn’t be a better time for the rate cuts and now that the Reserve Bank has achieved its goal, it’s time for relief,” Carroll said.

"In September, we saw most parts of retail go backwards and this will likely be the case with the October trading period as consumers save up ahead of the holiday trading season. 

“Discretionary item retailers have taken the biggest hit to sales since interest rates went up and they’ve been on the backfoot ever since. 

“A number of these businesses have gone into administration in the last two years and a rate cut before the year is out could restore some of that lost confidence.”

However, despite headline inflation falling to 2.8 per cent in the September quarter, down from 3.8 per cent over the year to the June quarter, the RBA claimed that part of this decline reflected declines in fuel and electricity prices alongside temporary cost of living relief.

“Abstracting from these effects, underlying inflation (as represented by the trimmed mean) was 3.5 per cent over the year to the September quarter,” the RBA reported. “This was as forecast but is still some way from the 2.5 per cent midpoint of the inflation target. 

“The forecasts published in today’s Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026.”

The path ahead also remains uncertain, according to the RBA, reflected by aggregate demand remaining above the economy’s supply capacity, “evidenced by the persistence of underlying inflation, surveys of business conditions and ongoing strength in the labour market.”

“Growth in output has been weak,” the RBA reported. “Past declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on household consumption, particularly discretionary consumption. 

“However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, has remained more resilient.”

Indications also suggest that the labour market remains tight, with employment growing strongly over the three months to September, by an average of 0.4 per cent per month. 

The unemployment rate was 4.1 per cent in September, up from its low point of 3.5 per cent in late 2022. 

“But the participation rate remains at record highs, vacancies are still elevated and average hours worked have stabilised. At the same time, some cyclical measures of the labour market including youth unemployment and underemployment have recently declined.”

“Wage pressures have eased somewhat but labour productivity is still only at 2016 levels, despite the pick-up over the past year.”

Adding in the forecasts and recent data, the RBA board believes that its current policy is restrictive and working broadly as anticipated - but there are uncertainties. 

The central projection is for growth in household consumption to increase from the second half of this year as income growth picks up, the RBA reported, and there is tentative evidence of an increase in spending in the September quarter. 

“But there is a risk that any pick-up is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market. 

“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes at a time of excess demand, and while conditions in the labour market remain tight.”

The RBA concluded that sustainably returning inflation to target within a reasonable timeframe is the board’s highest priority. 

While headline inflation has declined substantially, with the RBA noting this will remain lower for a time, underlying inflation is more indicative of inflation momentum and remains too high. 

“The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

As for the upcoming Christmas period, Paul Zahra expects much of the spending to happen in November than December. 

“We’re seeing changing shopping habits from Australians as they continue to combat the cost-of-living crisis,” Zahra said.

“A record number of shoppers are expected to turn to the Black Friday/Cyber Monday sales to buy Christmas presents to make their household budgets stretch further.

“Given the challenges experienced by the sector this year, retailers will be hoping to see sustained spending beyond that final weekend of November. 

“Discretionary retailers make up to two-thirds of their profits in the all-important Christmas trading period, hence it is critical to do well enough to be able to sustain the winter months. 

“Retailers employ tens of thousands of additional casual staff over the peak season providing many with the opportunity to earn additional income.”

Zahra said the ARA will continue to advocate for relief measures from the Federal Government.

“We need urgent action to ensure Australia’s $430 billion retail economy not only survives but thrives,” he said.

“It’s essential that retailers, both small and large, have the confidence to continue investing in their businesses over the coming months.”

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