In your latest Business Outlook ReportDeloitte Access Economics partner and lead author of the report Stephen Smith emphasized that key dates are approaching. Inflation data for the June quarter is expected in late July, and economic growth for the June quarter will be released in early September.

“These two data points record a critical August Reserve Bank board meeting and July’s labor release,” Smith said.

Smith said there are two clear paths emerging that are shaping up to be a significant fork in the road for the local economy next year.

"Down the road, June's strong quarter, truncated average inflation, could force the RBA to raise interest rates once more in early August, further crushing household and business confidence and erasing the benefits of tax cuts and real wage gains in the second half of 2024,” he said.

The alternative, Smith said, is for June's inflation result to be more benign, in line with the slower pace of growth in the Australian economy.

"This will lead the RBA to hold interest rates steady again next month, allowing households to lead a steady recovery in economic growth in 2024-25," he said.

"Deloitte Access Economics Forecasts Most Like the Second Time."

Kathryn Lee, partner at Deloitte Access Economics and co-author of the report, emphasized that the firm believes interest rates will neither rise nor should rise from current levels, citing several reasons for this.

According to Lee, interest rates are restrictive at their current level and although inflation is falling more slowly than expected, it is moving towards the RBA's target.

"Third, further increases in interest rates are unlikely to dampen price growth any more than they would otherwise," she said.

"Finally, the post-pandemic inflation spike hit Australia later than it hit other economies and therefore cooled earlier elsewhere as well. This has enabled short-term interest rates to be cut in several economies, while the prospect of lower interest rates in the United States and New Zealand has also strengthened significantly in recent weeks.

Expanding on this, Smith argued that a rate hike at the RBA's August meeting "cannot be justified" as it would undermine the cautious economic recovery.

A scenario where rates remain on hold, he explained, would enable the narrative of a strengthening Australian economy in the second half of 2024. to remain intact.

"In recent months, the number of people in the labor force has exceeded the pre-pandemic trend, while Australia's stock of productive capital is also as large as it would have been had it not been for COVID-19. This suggests that Australia's economy should be larger than it would be in the absence of a pandemic. But it's not," Smith said.

"How does this conclusion square with Australia's still low unemployment rate of around 4 per cent? This can be explained by a growing body of evidence suggesting that Australia's unemployment rate remains so low because of job growth in non-market sectors such as health and disability services.

"These jobs are important, but strong employment growth in these sectors is not usually associated with a booming economy."

Smith pointed out that interest rates have traditionally been used to help manage inflation caused by an overheating economy; by suppressing demand and slowing the rate of economic growth, higher interest rates can be used as a useful tool to deal with inflation.

However, he stressed that Australia's economy was not overheating, adding that the level of economic activity was below where the pre-pandemic trend would have taken it, even when capital and labor input were higher.

This, Smith said, shows that persistent inflation is not primarily driven by excess demand, but by other underlying factors.

“For example, housing shortages drive up rents, previous high inflation causes 'administrative' price increases for items such as school fees, and insurance premiums rise due to previous increases in claims costs.

"None of this kind of inflation is going to be tamed by higher interest rates," Smith said.