As Australians splurged billions on Christmas gifts and Boxing Day deals, all eyes are on the Reserve Bank of Australia (RBA) to see if this burst of consumer confidence will tip the scales toward an interest rate cut. With the RBA carefully monitoring economic activity for signs of recovery, the fate of borrowing costs – and household budgets – may come down to how freely the holiday cash flowed.
Holiday Sales Hold Sway Over RBA Decision
In a typical year, the week between Christmas and New Year’s sees Australians shell out over $3 billion, capping off a roughly $70 billion holiday shopping season. But this is no ordinary year, with the Reserve Bank laser-focused on whether consumers will maintain their free-spending ways in the face of sky-high interest rates and cost-of-living pressures.
According to projections from the Australian Retailers Association and Roy Morgan, consumers are expected to spend $3.7 billion in the final week of 2024, a 2.7% increase from the previous year. This uptick in sales would build on momentum from Black Friday and Cyber Monday, which the RBA noted in its December meeting minutes as a potential turning point for languishing consumer spending.
Household consumption grew at just half the pace the RBA anticipated in the first half of 2024, while GDP expanded a meager 0.8% year-over-year in the September quarter. This weakening of demand, combined with global headwinds, has the central bank weighing the risks of a sharper slowdown against the threat of persistent inflation should the economy heat up again.
Interest Rate Relief on the Horizon?
For debt-burdened Aussies, an interest rate cut would provide a welcome reprieve after the RBA’s relentless tightening campaign lifted the cash rate to a decade-high 4.35%. While financial markets are betting a reduction won’t materialize until April, a bumper holiday sales result could bring relief sooner.
If the future flow of data continued to evolve in line with, or weaker than, [the RBA’s] expectations … it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness.
RBA December Board Meeting Minutes
The RBA’s December meeting minutes reveal the board believed the risks of a slowdown started to outweigh the dangers of the economy overheating, a notable shift from the prior month when risks were seen as balanced. This suggests the threshold for a rate cut is lowering, with strong holiday sales potentially the factor that tips the scales.
Balancing Act Between Growth and Inflation
Governor Philip Lowe and the RBA board face a delicate balancing act in 2025. On one hand, lifting the cash rate to 4.35% from a record-low 0.1% in May 2022 has dramatically cooled housing and consumption. But inflation, while past its peak, remains uncomfortably high at 6.9%, well above the RBA’s 2-3% target.
If household spending drops more than expected, the RBA projects unemployment would rise to 4.6% by the end of 2025, a hefty jump from the current 3.9% rate. But cut rates too soon or too aggressively, and inflation could come roaring back.
The government projects GDP growth will undershoot RBA forecasts by a third to hit just 1% in 2024, further pressuring the central bank to switch from inflation-fighting to recession-prevention mode. Global bodies like the IMF agree risks are tilted toward a slowdown but caution against unwinding rate hikes prematurely.
The current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance.
IMF Note on Australia, December 2024
A Holiday Miracle for the Economy?
In this uncertain environment, a Christmas and Boxing Day sales bonanza could be the gift the economy needs. If consumers show they’re willing and able to spend despite high rates and inflation, it would signal underlying resilience that could flow through to higher investment and employment.
- Confidence is key. Robust holiday sales would boost both consumer and business sentiment, supporting activity into 2025.
- Jobs depend on it. If demand holds up, firms may be more likely to retain staff and hire new workers, capping unemployment.
- Growth driver. Consumption accounts for roughly 60% of GDP, so a spending recovery could single-handedly lift growth.
Of course, one shopping week doesn’t determine the course of monetary policy. The RBA will weigh a variety of factors in the months ahead, from wages to productivity to global financial conditions. But in a data-dependent world, the billions racked up at the registers this holiday season will undoubtedly shape the economic narrative – and interest rate outlook – as Australia heads into 2025.
Will a festive spending spree give the RBA a reason to cheer, or will inflation play the role of the Grinch? Only time – and the cash register tally – will tell if consumers delivered an economic miracle just in time for the new year.
