Although momentum in domestic demand has turned out a bit weaker than the RBA expected, in September the RBA contemplated scenarios warranting both tighter and looser financial conditions.
The RBA minutes for the September 2024 Board meeting were less hawkish about supply potential than the August minutes. However, we detect an increasing emphasis on assessments of financial conditions more broadly, and a willingness to see these as a reason to hold the cash rate where it is.
Underlying inflation was characterised as being too high still, although the minutes noted that headline CPI for August would print below 3% because of the electricity subsidies. The minutes also noted the slowing in growth of advertised rents, which will feed through to CPI rent inflation over time.
After highlighting in August the downward revision in the staff’s view of supply capacity, the minutes for the September meeting acknowledged that momentum in demand was also weaker than previously believed. Consumption had been weaker in the June quarter than the RBA expected and the response to the Stage 3 tax cuts had gotten off to a slow start in July. Even allowing for the reallocation of some electricity consumption from household spending to government subsidy (and so public demand), downside risks on household spending were front of mind.
In other words, some of the hawkishness of the August meeting was likely unwarranted. Indeed, it was toned down in the post-meeting statement and minutes for the September meeting. The RBA assesses that the output gap is still positive but closing. That said, we note that the median estimate of private sector economists for March quarter 2024 was just 0.1%. Against this downward revision to domestic demand, subsequent announcements by the Chinese authorities have mitigated some of the downside risks to Australia’s external demand. In addition, the Board noted the pick-up in credit growth and decline in longer-term interest rates. It therefore judged that financial conditions had eased in recent months.
The minutes described the labour market as still being tighter than full employment but easing broadly as expected. Some of the strength in labour supply was recognised as being a response to cost-of-living pressures, as we noted back in August. Job vacancies had not yet returned to pre-pandemic levels. However, we struggle to reconcile why that is the appropriate benchmark. Many advanced economies saw unemployment reach multi-decade lows in the late 2010s, while Australia still clearly had considerable labour market slack at that time.
The minutes acknowledged the point about productivity that Westpac Economics has been making for some time. A rising share of employment in the non-market sector is dragging down measured total productivity growth. Yes, some market sectors had also seen weak productivity growth, something we have also noted previously. This matters in the RBA’s framework for thinking about the economy because the relationship between wages growth and productivity growth determines unit labour cost growth and (assuming constant markups) so inflation. But since wages growth is indeed easing as expected, it is not clear why a trend common to other countries remains a medium-term concern.
The minutes also included the regular half-yearly update on financial stability and a review of the Term Funding Facility; the latter will also be the subject of a speech by Assistant Governor (Financial Market) Chris Kent, presumably the speech scheduled for this week. Neither section contained any news on the RBA’s current monetary policy thinking. However, there was a hint in the financial stability section that the Board is giving more thought to the risks to financial stability should financial conditions ease. This also plays into the risk discussed in the Considerations for Monetary Policy section, that financial conditions might ‘turn out to be insufficiently restrictive to return inflation to target’.
More broadly, the Board seems to be putting increasing weight on its assessment of financial conditions as a guide to where policy needs to be. Like ‘full employment’ or ‘the output gap’, ‘financial conditions’ is an invisible construct that can only be inferred, not observed directly. And like full employment and the output gap, the RBA has documented a checklist for how it assesses them. However, it has not yet explained what the mechanism is for looser financial conditions to result in higher inflation than expected or desired ‘even if the Board’s judgements about consumption, the labour market and supply potential prove correct’, as the minutes put it. Normally one would expect looser financial conditions to influence firms’ pricing decisions through stronger demand. Perhaps this will be explained further in future speeches.
