The Minutes of the Reserve Bank’s October Board Meeting show little change from previous discussions. The emphasis is on Australia’s slow wages. There is no specific discussion on the direct impact of supply shortages; energy costs; or strong demand on inflation but the Board does consider the prospect of inflation building more quickly than currently envisaged.
The Reserve Bank Board’s Minutes for the October meeting revealed very little evidence of any potential change in policy.
The key conclusion that has been used in recent Minutes was repeated, “It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate materially higher wages growth than at the time of the meeting.”
Central banks will always err towards allowing some flexibility on their targets and the labour market targets in the conclusion – “full employment” and “materially higher wages growth” allow that flexibility.
But in a recent speech the Governor made his inflation intentions quite clear and rigid. “It won’t be enough for inflation to just sneak across the 2 per cent line for a quarter or two. We want to see inflation around the middle of the target range and have reasonable confidence that inflation will not fall below the 2-3 per cent band again.”
That suggests that the Governor is committed to achieving at least one if not two consecutive annual prints of core inflation at 2.5% or above before he decides to raise rates.
The Bank’s current forecasts (August Statement on Monetary Policy) for core inflation are 1.75% by end 2022; and 2.25% by end 2023.
With those forecasts as the central case, we can see why the Bank sticks with the 2024 call.
At the next Board meeting on November 2 the Board will be given the revised forecasts which are released to the market on November 5 in the November Statement on Monetary Policy.
There is some evidence in the Minutes that the Board is at least considering the inflation implications of current developments. In previous Minutes we did not see much discussion on the inflation outlook. One liners featuring the words “moderate” and “gradual” were common.
In these Minutes the Board noted, “while it was possible that underlying inflationary pressures in Australia could build more quickly than currently envisaged the central forecast scenario was still that domestic inflation would pick up only gradually over the medium term.”
Upward pressure on inflation overseas is recognised but Australia is acknowledged as different due to the much more moderate lift in wages growth.
“Underlying inflation pressures in Australia were more moderate than in other advanced economies… This reflected a range of factors, including the relatively slow rate of wages growth in Australia.”
Surprisingly, given the intense concentration on “strong demand for goods globally, supply bottlenecks and rising energy prices “in the overseas section there was no discussion on this important development in the Australian context.
The Board did note a number of promising points to justify an ongoing relaxed assessment of the outlook for wages growth – “firms’ expectations for wages remained moderate”; “even in industries that had experienced strong labour demand, wages growth remained subdued.”
In summary “Overall there were few indications from disaggregated wages data or from the Bank’s liaison program to suggest that aggregate wages growth was likely to accelerate sharply in the period ahead.”
The other area of interest in the Minutes related to the Board’s summary points on the Financial Stability Review. Although we have already seen the full report it is always interesting to see the Board’s summary of what it considers to be the important points.
Prospects for future use of Macro Prudential Policies (MPP) were clearly set out. “Other options that could be used to improve borrowers’ buffers would be portfolio restrictions on individual lenders’ shares of lending at high debt to income ratios and/ or high loan to valuation ratios. “with APRA reported to be publishing a MPP framework paper later in the year it appears that any further policy adjustments will await the new year.
It is interesting from my perspective that the summary piece did not differentiate between owner occupiers and investors given that previous MPP (2015; 2017/18) had been directly targeted at investors.
Conclusion
Markets have been moving forward their timing of the first rate hike in the next cycle to well before Westpac’s timing of the March quarter 2023. We have held that view since June 18.
We are mindful that the Bank has tied itself to achieving that “sustainable” 2.5% print on annual core inflation. There is more flexibility around wages growth and full employment (Board has never tied it to a specific number).
There is evidence in the Minutes that the Board has discussed the possibility that inflation could lift more quickly than their central forecast.
Our unemployment and inflation forecasts are consistent with the Board achieving its objectives much earlier (Q1 2023) than the 2024 central case.
Of considerable interest will be whether the Bank adjusts its current inflation forecasts in the November Statement on Monetary Policy to reflect some of these recent global developments.
The print on headline and core inflation for the September quarter, which is due on October 27 will also be important.
While we see clear evidence of rising headline inflation (0.8%) we expect that the core print will remain around the benign 0.5% although higher numbers can be expected in 2022.
