US recession fears 'nail in coffin' for RBA hike chance

Recession worries in the United States will only bolster the case for keeping interest rates on hold in Australia at the looming Reserve Bank of Australia meeting.

Economists broadly agreed there would be no movement in the official interest rate on Tuesday following as-expected June quarter inflation numbers.

Betashares chief economist David Bassanese said new concerns about the US economy, triggered by weaker-than-expected jobs and manufacturing data, would likely be the “final nail in the coffin” for the case to lift interest rates.

The US unemployment rate unexpectedly climbing to an almost three-year high of 4.3 per cent sparked fears of recession, with a 50-basis-point cut viewed as a possibility at the Federal Reserve’s meeting in September.

A global equites sell-off was also under way, with the Australian sharemarket on track for its worst two-day decline since COVID-19 shook markets in 2020.

Mr Bassanese was not convinced the US would lurch into recession, with his assessment one of an economy “re-normalising” after the post-pandemic era of extreme labour shortages and stimulus-fuelled demand.

“Recessions usually arise from imbalances or shocks – and the US is not really suffering from either at present, with corporate and household balance sheets still in reasonable shape and inflation almost back to the Fed’s target level,” he said.

Yet he warned the negative dynamic could build momentum and inadvertently tip the world’s biggest economy into “at least a brief recession”.

Australia’s promising June quarter inflation print - especially on underlying price pressures - diffused talk of another hike and redirected attention to the timing of cuts.

There remains a diversity of views on the timing of easing, with two-thirds of 33 economists surveyed by Reuters expecting no move until 2025, with 10 forecasting at least one 25-basis-point cut in 2024.

HSBC chief economist Paul Bloxham expected the RBA to stay on hold for the rest of the year, even with other advanced economies cutting rates or signalling that way.

The RBA started hiking later than other central banks, lifted less than its peers and was dealing with weaker productivity growth, the economist said.

Hard border closures during the pandemic had led to labour shortages and an inefficient jobs market, he said.

Governments were also “running out of patience” and were supporting households with cost-of-living help that could complicate the inflation fight, Mr Bloxham added.

“In sum, demand has slowed by less than in many economies, supply is taking more time to improve and this means inflation is falling more gradually than elsewhere.”

A timely measure of inflation from the Melbourne Institute found price growth accelerating from 0.3 per cent in June to 0.4 per cent in July.

But on an annual basis, the indicator was back within the two-three per cent target range, at 2.8 per cent, for the first time after a long stretch above the RBA’s preferred band.

July’s annual fall was in part a product of a large increase in July last year, the Melbourne Institute said, pushed higher by surging energy prices.