The Reserve Bank of Australia is expected to leave the cash rate unchanged at 4.35%, according to CreditorWatch, which says late payments by Australian businesses have reached a six-year high.
That expected pause comes as businesses face mounting cash-flow strain, with a sharp rise in overdue invoices across several industries. In the food and beverage industry, 11.37% of invoices are more than 60 days overdue, while in construction, the figure is 7.15%.
Ivan Colhoun, Chief Economist at CreditorWatch, said holding rates steady would do little to ease those immediate pressures. His assessment comes as markets have ruled out a rate rise at the coming meeting and most economists expect no change.
Recent economic data has sent mixed signals to policymakers. The unemployment rate rose to 4.5% from 4.3% after employment fell by 19,000 in April, while trimmed mean inflation edged up to 3.4% from 3.3%, remaining above the central bank's 2.5% target.
National output was also weaker than expected every quarter, with gross domestic product growing 0.3% in the first quarter. Annual growth was 2.5%.
Colhoun said earlier rate increases had given the central bank room to assess the effects of tighter policy on inflation and the broader economy. He also pointed to geopolitical developments and domestic labour costs as factors shaping the policy outlook.
A key complication is the 4.75% minimum wage increase, which Colhoun said is well above the inflation target and could make it harder to return inflation to target. He singled out retail and hospitality as the sectors most likely to feel the added pressure.
Housing focus
Attention is also turning to signs of a softer housing market. Colhoun said three of the four major Australian banks now expect the next move in rates to be down, a shift he said appears to reflect emerging weakness in housing.
He said federal budget tax changes affecting negative gearing and capital gains could materially affect investor demand. In his analysis, the changes reduce investor borrowing capacity by about 10% to 20%, lowering demand and the prices investors are willing to pay.
That matters for monetary policy because housing affects the broader economy through several channels. House prices can influence household spending through wealth effects, while rents and prices for newly constructed dwellings are both major components of the consumer price index.
At the same time, Colhoun noted that the central bank does not target house prices directly. For policymakers, the key question is how softness in housing feeds into consumption, rents and construction costs.
What markets watch
Investors are likely to focus less on the formal decision statement and more on the Governor's remarks after the announcement. Colhoun said they will be looking for signals about how long rates may stay on hold, what conditions might prompt a cut, and how the bank interprets the latest labour market and inflation figures.
He also highlighted the importance of the next quarterly inflation reading. With inflation still proving sticky, that release is likely to shape expectations for the second half of the year.
While three major banks now believe the cash rate has peaked at 4.35%, one still expects further increases. Colhoun said back-to-back rises in the near term were unlikely, particularly if one recent source of inflationary pressure faded.
His broader view remains that any move towards easing is still some way off. He said low unemployment and wage pressures meant the risk of further tightening had not disappeared, even if the case for an immediate rise had weakened.
"The combination of a peace deal and some softness in the housing market remove the need for any further near-term tightening by the RBA Board, though the National Wage Case decision and continuing low unemployment rate mean any quick move to thoughts of easing is very premature and the risk remains of some further tightening," Colhoun said.
He added that businesses would welcome a pause in borrowing costs, but the operating environment remained difficult, with payment delays worsening and labour costs rising.
"Businesses and consumers alike will welcome the near-term reprieve from both interest rate increases and high fuel prices, though many businesses will still have to cope with additional pressure from an irresponsibly large minimum wage increase in the circumstances, particularly retail and hospitality. This will complicate the RBA's task reducing inflation to target," Colhoun said.