Key insights from the week that was.
This week’s key release for Australia was the minutes of the March RBA Board meeting. Clearly the RBA remains committed to QE for as long as purchases “will assist with progress towards the goals of full employment and inflation”. The Board is also willing to extend yield curve control if necessary, with a shift in the target from the April 2024 bond to November 2024 bond to depend on the “flow of economic data and the outlook for inflation and employment”. Importantly, whenever yield curve control is concluded, it will not be a binary event. This was evinced in the Minutes by “if the Board were to maintain the April 2024 bond as the target bond… the maturity of the yield target would gradually decline until the bond matured”, thereby providing a degree of forward guidance over the cash rate well into the future. Presumably this would also apply if the November 2024 bond is adopted as the target before yield curve control concludes.
While cognisant of the momentum our economy is currently carrying, most notably that employment and hours worked are back above pre-COVID levels, like the RBA, we believe Australia is operating with considerable spare capacity and that the unemployment rate is too high. We see this situation calling for a continuation of asset purchases through most of 2022 and the rolling of the yield curve target from April 2024 to November 2024, most likely at the August 2021 meeting. On an eventual cash rate hike, the Board does not expect conditions “to be met until 2024 at the earliest”. This is despite recognising in the March minutes that “market pricing implied that the cash rate was expected to remain unchanged in 2021 and 2022 before rising by around 50 basis points by the end of 2023”.
While employment and inflation are the goals for policy, the RBA also continues to assess the housing market carefully, specifically trends in borrowing and lending standards. Actual price gains in recent months have been ahead of expectations. At the current pace, our February forecast for a 10% gain in prices in 2021 will be achieved by June. While a moderation is likely, as was outlined this week, a sudden loss of momentum near term seems unlikely. As a result, Westpac now expects a 15% gain in 2021, although this comes at the expense of our 2022 view for price growth which has been reduced to 5%, keeping the gain over the two years to 20%.
In New Zealand, the Q1 CPI came in as expected by the market but a little below the RBNZ’s assumptions, prices rising 0.8% in the quarter and 1.5%yr. As discussed by our Westpac New Zealand Economics team, supply disruptions have boosted inflation, but less than anticipated, with the price of many household items easing back in early 2021 after having been pushed higher in 2020 by shortages. While New Zealand inflation is expected to rise to 2.5%yr this year, this acceleration is not expected to last. Into the medium-term, inflation pressures are expected to be modest. Note, Australia’s Q1 CPI is due next week. A preview is forthcoming.
Moving offshore, the initial focus was China after a run of recent data. To us, China’s 2020 outperformance is only the beginning. While GDP growth will certainly slow in 2021 versus 2020, the starting point is an 18.3%yr gain to March 2021. Moreover, the level of GDP in China is around 7 percentage points above that at December 2019 – in stark contrast to the rest of the world who are still in recovery. The main point to take from recent data regarding outperformance however is that their drive for high-quality investment is laying a strong foundation for sustained robust economic development and strength in household demand, the latter funded by recurring income gains and accumulated wealth – the antithesis of the US where the recovery has been built on temporary, short-term support for household incomes. We continue to expect a 10% year-average gain for China GDP in 2021 followed by a sustainable 5.5-6.0% pace from 2022.
The implications for commodity prices of strong Chinese demand, the global recovery, and technological change were highlighted this week by the Westpac Strategy and Economics group as the potential emergence of a new commodity cycle was debated.
Closing out the week, the ECB Governing Council met overnight for their April meeting. The Council made no changes to the main policy instruments, and cautiously spoke to the prospects for recovery despite the immediate headwinds facing the bloc. To curtail remaining risks and give growth the best opportunity ahead, the ECB will maintain an elevated pace of weekly bond purchases under its Pandemic Emergency Purchase Programme (PEPP) for the current quarter. At the June meeting, the ECB will publish an updated set of macroeconomic projections, which will incorporate the stronger run of recent data and the acceleration of the vaccine rollout. As such, the June meeting appears to be the most likely window to dial back the pace of weekly PEPP purchases and commence the gradual journey toward policy normalisation.
The ongoing need for ultra-accommodative monetary policy in Europe is a striking contrast to Canada. There, the Bank of Canada has announced a taper of asset purchases from $4bn to $3bn per week after materially revising up their forecasts for growth and inflation. Growth in 2021 is now seen at 6.5% instead of 4.0%, and inflation around or above 2.0%yr in 2021-2023.
