RBA braces for policy test as disinflation fades, jobs at risk
At the same time, home prices across Australia’s major cities are on a tear, fuelled by a chronic supply shortage and robust demand
[SYDNEY] Just as Australia’s central bank was on track to meet its inflation and employment mandate, fresh data may suggest emerging headwinds that challenge the interest rate-setting board’s assumptions.
Third-quarter consumer-price data on Wednesday (Oct 29) is shaping as a critical guide for governor Michele Bullock and her colleagues ahead of their Nov 3 to 4 policy meeting. Economists predict the closely-watched trimmed mean figure will stall at 2.7 per cent, compared with the Reserve Bank of Australia’s (RBA) August expectation of a fall to 2.6 per cent.
A rekindling of price pressures, already evident in consecutive monthly gauges, would likely see the board stand pat next week after three rate cuts this year. The RBA operates under a dual mandate and aims for inflation at the midpoint of its 2 to 3 per cent target while trying to maintain sustainable full employment.
Signs of complications in the “last mile” of inflation and slowdowns in labour markets present central banks, including the RBA, with a difficult “high wire balancing act”, said Stephen Miller, an investment strategist at GSFM.
“A quarterly result above 2.7 per cent will make it difficult for the RBA to cut the policy rate” next week, Miller said. “Anything below 2.7 per cent probably green-lights a cut.”
RBA officials currently assess policy as “marginally tight” and Bullock is expected to shed more light on the outlook during a fireside chat in Sydney this evening. Her views on the job market are likely to be heavily scrutinised after unemployment surprisingly jumped to 4.5 per cent.
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With the cash rate at 3.6 per cent since August, Australia’s economy has expanded steadily, credit growth is improving and the labour market remains close to full employment. Reflecting the strength of domestic demand, costs for insurance, rents and dining out continue to climb.
Adding to these worries are signs of a turnaround in goods inflation, which had cooled steadily over the past year. That suggests the broader disinflationary impulse may be fading. If sustained, policymakers would likely shift to a prolonged rate pause. Money market pricing implies two more reductions by next year for a terminal rate of 3.1 per cent.
At the same time, home prices across Australia’s major cities are on a tear, fuelled by a chronic supply shortage and robust demand. The housing component of Australia’s CPI basket, which includes the cost to build a new home, electricity prices, rents and property rates, has been one of the biggest drivers of inflation in recent months.
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That pressure is unlikely to abate with Australia falling behind on its goal to build 1.2 million homes by the end of the decade and the government providing sweeteners to first-home buyers in a move that’s further boosting demand.
Government spending is beginning to ease, after years of heavy outlays dating back to the pandemic, though it remains elevated. With the RBA having lowered borrowing costs to support economic growth and anchor employment, households have regained some spending power.
The handover to the private sector is becoming clearer as public demand wanes, a vital shift to maintain the economy’s growth momentum in the period ahead.
Another reason for the RBA to tread carefully is Australia’s poor productivity growth, among the weakest in the developed world and a major worry for policymakers. The RBA in August downgraded its medium-term productivity growth assumption to 0.7 per cent from 1 per cent.
It also cut its estimate of potential economic growth to 2 per cent and warned that persistent weak productivity will likely keep unit labour costs, and in turn inflation, elevated.
Yet the labour market remains tight by historic standards even after the recent jump in the jobless rate. Employment growth is still holding up as is the participation rate, or percentage of the working age population that is either employed or actively looking for work.
Job vacancies, a barometer of labour demand, have come off their 2022 peak but still remain high, suggesting further hiring ahead.
“Rising inflation alongside a tight labour market indicates there is more excess demand in the economy than the RBA’s August forecasts imply,” said Nick Stenner, an economist at Bank of America Securities who previously worked at the central bank. “We expect the RBA’s data-dependent strategy will see a hold in November to await further information.” BLOOMBERG
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