While continuing to acknowledge a more positive outlook as far as growth and employment are concerned, the absence of any “lived experience” of price or wage inflation will likely see the RBA continue with the application of historically high levels of monetary accommodation, at least in the very near-term.
More importantly, I expect the Governor to reiterate the Board’s prior view that a policy rate increase is “unlikely to be until 2024 at the earliest”.
This is in contrast to its trans-Tasman cousin, the RBNZ, who last week foreshadowed a policy rate increase in 2022. It also contrasts to the sentiments expressed by central banks in other developed commodity-intensive economies, such as the Bank of Canada and the Norges Bank in Norway, both of whom have indicated that they are in active contemplation of a retreat from historically high levels of monetary accommodation.
In that sense, a more relatively cautious tone from the RBA would be in line with what we’ve seen from major central banks such as the Fed and the ECB.
The expected relative caution from the RBA is motivated by the absence of any “lived experience” of wage and / or price inflation. The inflationary pressures in the US are clear but are less visible in Australia.
While base effects will see June quarter annual ‘headline’ inflation likely get close to 4 per cent, the RBA’s preferred trimmed mean measure is forecast to be around 1.5 per cent – still well south of the RBA’s 2-3 per cent target. Indeed, the RBA forecasts only have inflation reaching the bottom of the 2-3 per cent inflation target band in June 2023, and even then wages are forecast to be running at a paltry 2.25 per cent.
As part of the quest to generate tight labour markets and attendant wage and price inflation, the RBA remains motivated to avoid an unwelcome upward movement in the Australian dollar (AUD). Any move up in the AUD could well frustrate the task of getting unemployment down and wage growth and inflation up. It seems clear that the RBA has achieved its stated objective in pursuing yield curve control and QE of “keeping the AUD lower than it otherwise would have been” (witness the depreciation versus CAD, NOK over the last few months or so and, in the last week, versus the NZD). In my view, it won’t wish to unwind those achievements by “prematurely” foreshadowing a significant retreat from the currently historically high levels of monetary accommodation.
The RBA also appears largely unconcerned by market expectations of inflation rebounding. Like the Fed, this may reflect a belief that any near-term inflation will be essentially transitory. It may also reflect that current market-based expectations of inflation are toward the bottom end of the RBA’s 2-3 per cent target range.
Having said that, the tone of Tuesday’s Statement may hint – ever so slightly – that the time may be approaching when the RBA Board may need to consider whether the current historically high levels of monetary accommodation will continue in its current form.
The RBA Governor has indicated that a decision on whether the 3 year bond target will roll to the November 2024 bond from the current April 2024 bond will be made at its July meeting (I suspect that the decision will be not to roll). That meeting will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September (where I also suspect that the pace and / or amount of bond purchases will be reduced). As Deputy-Governor Debelle noted in a speech in May, the pace of RBA’s purchases have sometimes exceeded AOFM issuance. That clearly is not sustainable.
However, such adjustments are relatively minor in the scheme of things, especially compared to the adjustments foreshadowed by the Bank of Canada, Norges Bank and the RBNZ, and reflect a lessening of the ‘macro policy emergency’ from that which prevailed at the nadir of the pandemic.
Of course, the RBA prognosis for monetary policy could change if current anecdotes of labour shortages bring forward significant wage increases. This includes a consideration of when the RBA might feel comfortable in contemplating a lift in the policy rate. It also seems that the balance of risks around the RBA ‘central case’ of “2024 at the earliest” are for such an increase to be before that time. I suspect that is a view that is privately held among the denizens of Martin Place, even if it is not one that might be publicly aired. And such a risk unlikely to be canvassed in Tuesday’s Statement.
It remains the case that while the economy’s performance has certainly exceeded expectations, recent price and wage growth remains at levels that are still uncomfortably low for the RBA and its inflation objective. The unemployment rate, again while having bettered expectations, is still some way north of the 4 per cent or even “3 point something” previously cited by the Governor as getting close to capacity.
While ever that remains, and while ever the Fed remains in no hurry to adjust its settings, and while ever there is no “lived experience” of adequate wage and price inflation, we should expect the maintenance of the historically high accommodatory tack from the RBA.
By Stephen Miller, GSFM investment strategist
