Key insights from the week that was.
Beginning in Australia, the RBA March Minutes revealed important developments in the considerations for, and operational framework around, monetary policy. On the former, it appears the RBA Board did not discuss the case for a rate hike in March, focusing solely on the case to remain on hold. That is a departure from this cycle’s common practice of considering multiple policy options at each meeting. The change in rhetoric was relatively marginal, however. The Board continues to recognise that, amid the currently restrictive policy environment, inflation is decelerating as demand and supply come into balance; that said, the Board needs more confidence in inflation’s sustainable return to target before debating the timing and scale of policy easing. We remain of the view that the Board will have this confidence by September, allowing the RBA to embark on a measured rate cutting cycle, 25bps per quarter to 3.10% in Q3 2025.
This week, Chief Economist Luci Ellis also discussed the RBA’s change to operational arrangements for monetary policy. The Board have decided to implement a regime of ‘ample reserves’ as the means of controlling the cash rate, similar to what is currently used by the Bank of England and ECB. This regime should still provide protection against the risk of sudden declines in exchange settlement balances compared to the pre-pandemic ‘scarce reserves’ regime; but, in the context of already-declining liquidity – as unconventional monetary policies are unwound – a regime of ‘ample reserves’ implies lower risks of market distortions than the pandemic-era ‘excess reserves’ regime. Overall, these changes are purely operational and have no implications for the stance of monetary policy.
This week’s updates on housing were a little murkier than usual. Headline (non-seasonally adjusted) figures from CoreLogic’s home value index suggest that house price momentum has improved since the turn of the year (0.2% in Dec to 0.6% in Mar). However, on our figuring, momentum in seasonally adjusted terms imply the opposite, with gains decelerating over recent months (0.5% in Dec to 0.3% in Mar). At the same time, the total volume of dwelling approvals look to be cycling lower still in 2024 (–5.8%yr) after spending much of 2023 near pandemic-era lows. While seasonal issues across both sets of data are making it more difficult to judge the underlying trend, it remains clear that Australia’s residential construction pipeline has shrunk significantly and, consequently, that tight housing supply will remain an underlying support for prices into the medium-term.
In the US meanwhile, the ISM manufacturing index rose 2.5pts while the non-manufacturing index fell 1.2pts. Both remain below their long-run averages. The sub-indices suggest conditions will shortly warrant policy easing. Both price sub-indices are now below long-run averages – periods over which inflation was low and stable. Although the employment sub-indices firmed in March, they remain at levels consistent with aggregate job loss. Regional indicators of employment and investment also suggest businesses are increasingly becoming cautious on the outlook. Note the March employment situation report is due tonight and the March CPI will follow next week.
Over in Europe, inflation eased to 2.4%yr in March, undershooting expectations of both the European Central Bank and market participants. However, services inflation remained sticky at 4.0%yr and now accounts for around 70% of total inflation. As goods inflation bottoms out, services inflation will have to soften to keep aggregate inflation near the 2.0%yr target.
