Pedestrians walk past the Reserve Bank of Australia building in central Sydney. — Reuters
SYDNEY: It’s 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 can’t rule out another hike. So, while RBA communication has turned more dovish, economists are struggling to define its policy stance.
Goldman Sachs Group Inc and Commonwealth Bank of Australia reckon it’s neutral, while Australia & New Zealand Banking Group Ltd (ANZ Bank) said there’s still a mild tightening bias.
“The RBA’s reaction function is opaque,” said Andrew Boak at Goldman. “It’s 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% cash rate late this year.
There’s 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 wasn’t discussed for the first time since the tightening cycle began in 2022.
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 isn’t 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.
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% in February and employment grew at an annual rate of 3.2% 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.
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% 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 AG, which expects the RBA will keep borrowing costs higher for longer.
Meanwhile, household wealth in Australia climbed 2.5% in the final three months of 2023 to a record A$16 trillion (US$10.5 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% 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.
Separately, the Reserve Bank of New Zealand’s (RBNZ) may this week push back against investor bets that interest rate cuts are coming, even though the economy has slumped into a double-dip recession.
The central bank will keep the official cash rate (OCR) at 5.5% for a sixth straight meeting tomorrow in Wellington, according to all 15 economists in a Bloomberg News survey.
They expect policymakers to stress the need for rates to stay restrictive for a prolonged period to tame inflation.
“Markets have taken a more aggressive view on the timing and extent of OCR cuts. Those expectations will be disappointed this time around,” said Kelly Eckhold, chief New Zealand economist at Westpac Banking Corp in Auckland.
“There is little to support the idea that interest rates can be cut much earlier than the RBNZ previously assumed.”
The Reserve Bank in February projected it won’t start easing policy until 2025, citing concerns that record immigration will add to demand.
Since then, data showed the economy slid back into recession in the second half of 2023, prompting investors to fully price in a pivot to rate cuts in the third quarter of this year.
The RBNZ will release its decision tomorrow, and will be a policy review rather than a full monetary policy statement. Thus, the bank won’t publish fresh economic forecasts or hold a news conference with governor Adrian Orr.
Most economists expect the first rate cut will occur in the fourth quarter, although some see one as early as August. Westpac and ANZ Bank don’t see cuts starting until early 2025.
By contrast, investors are pricing two cuts and a 70% chance of a third before the end of this year, swaps data showed.
Central banks globally are focused on how quickly inflation is slowing and when they can begin easing.
The Swiss National Bank unveiled a surprise rate cut last month, while the RBA has indicated its next move is down. — Bloomberg
