Key insights from the week that was.
It has been another week focused on inflation, wages and monetary policy in Australia and abroad.
Tuesday saw the release of the RBA’s November meeting minutes and a speech by Governor Lowe on inflation. Our Chief Economist Bill Evans subsequently discussed the key ideas conveyed. From the minutes, most notable is that the RBA Board is planning an enquiry into Yield Curve Control and the other extraordinary monetary policy measures implemented during the pandemic.
Governor Lowe’s speech on the other hand focused on global and local inflation dynamics. A key explanation for the recent strength in inflation globally is the disparity between goods supply and demand, with production limited by the pandemic at the same time as lifestyle changes and support from fiscal policy saw goods demand skyrocket. Ahead, authorities believe these pressures will subside as supply chains reset and consumer services fully open, allowing for a more balanced consumption basket.
The prime issue for inflation going forward will therefore be how the labour market, particularly wages growth, responds to recent inflation pressures. Broadly, Governor Lowe was sanguine on the outlook for wages in Australia. In particular, he highlighted that the strong wages growth seen in the US and UK had been supported by a mismatch of labour supply and demand. Countries like Australia and Japan, in contrast, had not built up an imbalance thanks to the success of programs like JobKeeper which kept employees attached to their employers during lockdown. The inertia of our wage setting system was also seen as a mitigating force.
All told, the speech emphasised the focus of the Board on achieving its medium-term policy objectives and, while aware of the risks, their belief that they need to be patient to do so. The Q3 wage price index out this week supports this view, with wages rising 0.6% in the three months to September and 2.2%yr – growth in keeping with conditions prior to the pandemic, but weak versus the history of the survey.
In stark contrast to the RBA, next week in New Zealand the RBNZ is set to follow-up its 25bp October rate increase with another at the November meeting. Indeed, while not their base case, our New Zealand team recognise a 50bp move as a “meaningful risk”.
Either way, Westpac New Zealand economics believe the RBNZ is only at the beginning of a long tightening cycle to 3.00% in mid-2023. Justifying this course, the RBNZ’s gauge of inflation expectations rose to a decade high in Q4, with both the 1-year and 2-year measures materially above the 2.0%yr mid-point of the RBNZ’s inflation target range. These outcomes come as the New Zealand economy is showing strong underlying momentum and with closed borders and the financial position of households heightening inflation risks. Our New Zealand team’s latest quarterly Economic Overview provides an in-depth look at the state of their economy and the outlook.
Moving further afield, following last week’s extremely strong US CPI for October, inflation updates for the UK and Euro area this week confirmed that price pressures related to supply chains and energy are global phenomena, with annual inflation at 4.2%yr and 4.1%yr respectively. For both jurisdictions, these are highly unusual outcomes, more than double their central bank’s targets.
Arguably, the difference between the outcomes seen in the US versus the UK/ Euro Area is the breadth of price pressures, with less evidence of demand-led inflation in the UK/Euro Area arguing for a more rapid return towards target in these economies. The policy consequence of such an outturn would be a more muted rate hike cycle from the Bank of England than the FOMC, and likely no move on rates by the ECB. Note though the Bank of England could act well ahead of the FOMC given their asset purchases will conclude six months earlier.
Finally, a quick note on China. October retail sales surprised to the upside this week, suggesting that authorities have significantly improved their ability to control sporadic outbreaks of delta without a material consequence for consumption. Recognising that this delta disruption came later in the month, we will however have to wait until the November data is received before we can have full confidence in this view. The investment data that accompanied retail was weaker though, all considered, still robust. In the months ahead we will be looking for an acceleration in private sector business investment, with external demand and domestic economic development providing strong justification for capacity expansion. It will take some time for the property sector and infrastructure investment to reset however following the lengthy program of reform seen over the past few years.
