RBA’s guarded policy stance highlights sticky inflation worries

IT IS been five months since Australia last raised interest rates and in the interim inflation has moderated and the economy slowed to a crawl. Yet Reserve Bank of Australia (RBA) governor Michele Bullock insists she cannot rule out another hike.

So while RBA communication has turned more dovish – as the chart below shows – economists are struggling to define its policy stance. Goldman Sachs Group and Commonwealth Bank of Australia reckon it is neutral, while Australia & New Zealand Banking Group said there is still a mild tightening bias.

“The RBA’s reaction function is opaque,” said Andrew Boak at Goldman. “It is instructive that the RBA’s policy stance has shifted more dovish even as they have interpreted the macro data to have simply met their forecasts.”

Boak anticipates the central bank will shift to an “explicit easing bias” only after next month’s national budget. The broad consensus of economists is that the RBA will begin cutting its 4.35 per cent cash rate late this year.

There is definitely been a degree of ambiguity in RBA communications in recent weeks. When asked at her March press conference whether a rate hike was considered at the meeting, Bullock responded that “the board considers a range of possibilities” and “where we are now is where we need to be”.

Yet minutes of that meeting released last week showed the case for a rate hike was not discussed for the first time since the tightening cycle began in 2022.

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Bullock’s determination not to be pinned down reflects the pain caused by ex-governor Philip Lowe’s guidance during the height of Covid that rates were unlikely to rise until 2024. That became a millstone when inflation erupted post-pandemic. Bullock is not going to make the same mistake.

Bullock knows the RBA has only one chance to get the timing of the easing cycle right. If the board cuts rates and price pressures suddenly reignite and force a reversal, its credibility will take a hammering.

The following three charts explain what is staying the RBA’s hand from acknowledging a shift to neutral and that its next move will be to ease.

Still-low unemployment

Like a number of developed economies, Australia’s labour market has shown extraordinary resilience to restrictive monetary policy settings. The jobless rate unexpectedly dropped to 3.7 per cent in February and employment grew at an annual rate of 3.2 per cent in the month.

The worry for the RBA is the still-tight labour market could spur significant wage demands that, without productivity gains to offset them, could drive a fresh round of inflationary pressures. Australia’s Fair Work Commission is set to hand down its decision on minimum wages – a benchmark for other individual and enterprise agreements – in early June. That will be an important signal for the central bank.

Red-hot housing market

Australia’s house prices have been defying gravity, advancing for a 14th straight month in March despite borrowing costs increasing by 4.25 percentage points between May 2022 and November last year.

A dearth of supply and a spike in immigration are key to prices surging nearly 10 per cent in the past year. Australia needs to ramp up dwelling approvals to about 400,000 a year by 2027, from around 160,000 now, to meet an ambitious government target of 1.2 million new homes by 2029, Oxford Economics estimates.

“We see stronger-than-expected house prices as a factor which should constrain their ability and willingness to cut the cash rate,” said George Tharenou at UBS Group, which expects the RBA will keep borrowing costs higher for longer.

Rising household wealth

Meanwhile, household wealth in Australia climbed 2.5 per cent in the final three months of 2023 to a record A$16 trillion (S$14.2 trillion), underpinned by increased property and equity values. The result is more remarkable given borrowing costs at a 12-year high and increased loan repayments.

UBS said Australia’s household wealth-to-income ratio advanced to a staggering 1,043 per cent in the first three months of this year. That may help explain why the RBA’s rate hikes have resulted in less weakness in consumption than anticipated. BLOOMBERG