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The likelihood of the Reserve Bank of Australia (RBA) lifting the cash rate at its first meeting in 2024 is remote.
Records have shown the central bank has only hiked rates at three February meetings over the past 33 years*.
The Australian Government’s latest cost-of-living relief package – which will come in the form of amendments to the Stage 3 tax cuts – is unlikely to change these odds, according to RSM Australia Economist Devika Shivadekar.
Ms Shivadekar described the Government’s reported intention to move the goal posts of the Stage 3 tax cuts as "well-targeted towards taxpayers in the greatest need of cost-of-living relief’’.
The amendments include lifting the tax-free threshold to $19,000, lowering the 19 per cent tax rate for incomes up to $45,000 and bringing back the 37 per cent tax rate for Australians earning between $135,000 and $190,000, after which the 45 per cent rate will apply, according to media reports**.
``If these changes are implemented, they shouldn’t make the RBA’s job of bringing inflation down harder because the increase in available household discretionary spending will be marginal, used for essentials and won’t materialise until later in July,’’
``This contrasts with sizeable cash hand-outs which create immediate economic stimulus that stokes inflation.
While the Government’s prior round of cost-of-living measures during the pandemic were well-intentioned, they somewhat lessened the impact of the RBA's rate hikes on restricting demand, resulting in the delayed disinflationary cycle we are now experiencing. The Government will have ideally factored this in when proposing the Stage 3 tax cut amendments.’’
Ms Shivadekar said all indicators pointed to the RBA keeping rates on hold at its first 2024 meeting on 5-6 February.
``"When the RBA raised rates in February 2023 annual inflation was running at 7.8 per cent – the highest level since 1990,’’
``In contrast, when the RBA meets next month, the latest data will paint a picture of an economy moving at a snail’s pace, inflation trending down, early signs of the labour market slowing and households and businesses under extreme pressure.
``Keeping rates on hold is the most plausible move in the first half of 2024 with moves in either direction unlikely to be considered by the RBA until the third quarter. The RBA would like to wait, watch and confirm that inflation is indeed trending down and the tax cuts have had minimal impact.
``"The RBA faces many uncertainties in 2024. It will closely monitor domestic and global events, especially China's evolving economic landscape, the actions of other central banks and the geopolitical risks in the Middle East that could have economic spillovers.’’
RSM Australia Chief Executive Partner Jamie O’Rourke said the first half of 2024 would be tough for many businesses as the economy and consumer demand continued to slow and the Australian Taxation Office (ATO) stepped up court action to collect $50 billion in outstanding personal and business tax debt – the majority being small business debt. Middle market businesses will face material constraints in accessing capital.
``The rate of business failure has intensified over the past six months off the back of action taken by the ATO and other large creditors to claw back money they are owed by struggling businesses. In the first six months of the 2023-24 financial year there were approximately 5,000 insolvencies compared with almost 8,000 over the full 12 months of the 2022-23 financial year,’’
``The economy is expected to stabilise in the second half of 2024 if inflation continues trending down. If the reported Stage 3 tax alterations are approved and realised, they should help bolster consumer and business confidence – critical components to stimulate business cashflow and investment.’’
``The message for struggling businesses is to engage with the ATO and independent business advisors to help them navigate this challenging period,’’ he said.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
* The RBA lifted the cash rate at February meetings held in the following years: 2023; 2008; 2000: Source: RBA - Cash Rate Target | RBA
** “Tax cut for top earners halved under stage three changes”, AFR
