This article is from the Australian Property Journal archive
THE Reserve Bank’s most recent board meeting saw a “clear step down” in its hawkishness, although deputy governor Andrew Hauser reiterated yesterday that the central bank will only act on interest rates when inflation stops being “sticky”.
Minutes from the RBA’s September board meeting, which saw the official cash rate maintained at 4.35%, showed discussion around monetary policy focused on upside and downside risks to the outlook and inflation.
Official inflation figures for August were released the day after the conclusion of the two-day meeting, and showed the biggest monthly drop since December, with the annual underlying rate – the measure watched most closely by the RBA – falling to 3.4% in August, with housing continuing to be a significant contributor to the year-on-year gain.
Hauser told a lunch in Sydney yesterday that “our day job” of bringing down inflation was not finished.
“As soon as it stops being sticky, we’ll react,” he said.
“It’s a big job and we’re not done yet,” he said.
The minutes showed the board discussed scenarios in which future monetary policy might need to be held restrictive for a prolonged period or tightened further, including a material pick-up in consumption growth in response to a recovery in real household disposable income, which was likely to have begun around mid-year.
“If that were to occur, labour market outcomes could be stronger than forecast and inflation would return to target more slowly,” the minutes said.
The board judged that labour market conditions in Australia were still tight relative to both full employment and conditions in other economies.
Another scenario was if the outlook for aggregate supply proved to be more constrained than expected, such as if the economy’s current supply potential had been overestimated or if future productivity growth turned out to be weaker than assumed.
“Members also considered a formal analysis in which the economy’s supply capacity was more limited than currently assumed. In this case, the cash rate might need to be noticeably higher than the market path underpinning the August forecasts, in order to bring inflation sustainably back to target by 2026.”
To the downside, the board considered the scenario in which the economy proved to be significantly weaker than expected, placing more downward pressure on underlying inflation than expected.
“This could occur if households saved a significantly larger proportion of their incomes than currently assumed, perhaps because of earlier declines in real income and/or more persistent uncertainty. It could also occur if the labour market weakened more sharply than forecast.
Another scenario was if inflation proved less persistent than assumed, even without weaker-than-expected activity. This could occur, for instance, if rent inflation fell more rapidly, falling petrol or other commodity prices materially reduced firms’ cost base or the decline in discretionary spending flowed through materially more quickly to services inflation.
“The minutes contain a clear step down in the RBA board’s hawkishness,” said ANZ head of Australian economics, Adam Boynton.
“This leaves the door open to a shift to neutral by the end of this year and then easing in early 2025.
“We continue to expect the first cash rate cut in February 2025.
The RBA remained unphased by central banks in major economies such as the United States, United Kingdom and Canada, as well as New Zealand, beginning rate cutting cycles.
“Members agreed that, while it was important to take account of economic developments abroad, it was not necessary for the cash rate target to evolve in line with policy rates in other economies since Australian inflation was higher, the labour market stronger and monetary policy less restrictive than in many other advanced economies,” the minutes read.
“The exchange rate could also adjust as interest rate differentials between Australia and other economies evolved.”
It noted that financial market conditions had been calmer following the bout of extreme volatility around the time of the previous meeting. However, several of the contributing factors to the volatility remained in place, such as elevated risk-taking and leveraged positions.
The next board meeting will be held over November 4th and 5th, with the decision to be announced half an hour before the Melbourne Cup is run.
