An extended pause for the RBA

At the RBA Board meeting on 1 August this week, the Board decided to leave the cash rate target unchanged at 4.1 per cent. Ahead of the meeting, a majority of economists had tipped a 25bp rate increase, although financial markets had signalled a high probability of no change. (My take was that it looked like another close call, but that a pause was the more likely outcome.)

Australia’s central bank has now gone two consecutive meetings without delivering a rate increase for the first time since the current policy cycle began in May last year. In the accompanying statement, the RBA explained that:

‘Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.’

Put slightly differently, the pace and scale of the policy adjustment to date, plus the uncertainty around the lagged impact of that tightening, mean that the RBA continues to see value in waiting. It also reckons that current policy settings are doing their job in taming inflation, judging that Australia is currently on track to enjoy a soft landing:

‘The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.’

All of which reinforces the point made last week that the RBA is nearing the end of its tightening cycle. That does not necessarily mean that the central bank is finished hiking, however. Tuesday’s statement warned:

‘Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.’

Granted, some of this messaging may just be expectations management on the part of an RBA keen to avoid stoking prices pressures through the expectations channel. More fundamentally, the RBA continues to signal that any further policy changes will depend on the flow of data, and particularly on the evolution of wages and prices. In that context, it is notable that the statement references both upside risks to inflation (the possibility of persistent services price inflation, the impact of a still-tight labour market on future wage growth) and downside risks to activity (those monetary policy lags, the fact that many ‘households are experiencing a painful squeeze on their finances’ – see also the discussion on retail sales volumes in the next section).

It follows that, should the data permit it, we could be in for an extended policy pause. Certainly, there has been a marked downshift in the sense of urgency coming from Martin Place since earlier this year. Between May 2022 and March 2023, the RBA increased the policy rate by a cumulative 350bp over 10 consecutive meetings. Subsequently, after pausing at the April 2023 meeting, the central bank has ‘only’ delivered a further 50bp of increases over the past five meetings, with back-to-back hikes in May and June, but no action since. The clear message from the past two meetings is that if conditions allow it, the RBA is content to watch and wait.

And yet, with headline inflation still running well above target and above the cash rate itself, the arrival of any upside inflationary surprise in the data would almost certainly trigger an ‘insurance policy’ hike. Hence last week’s caution that, despite the RBA’s recent reticence, this cycle may still have another increase in it.

This week on The Dismal Science podcast, we discuss how the RBA left rates on hold again this week. And we ask if there are any more rate rises left.

What else happened on the Australian data front?

Last Friday, the ABS said the nominal value of retail trade fell 0.8 per cent over the month in June 2023 (seasonally adjusted) but was up 2.3 per cent relative to June 2022. Sales were down across all non-food industries, with the largest decline recorded by Department stores (down five per cent over the month), followed by Other retailing and by Clothing, footwear and personal accessory retailing (both down 2.2 per cent). The market consensus had expected retail sales to be flat across the month, making the actual result a downside surprise. According to the Bureau, the sharp drop in sales in June reflected weaker than usual spending on end of financial year sales, a development the ABS attributed to ongoing cost-of-living pressures. While spending on food was up again, the Bureau said much of this reflected rising food prices.

Subsequently, updated numbers on the volume of retail trade, released this week, reported retail sales volumes falling 0.5 per cent over the June quarter (seasonally adjusted) to stand 1.4 per cent lower than their Q2:2022 level. The Bureau commented that, setting aside the pandemic period, this was the first time since 1991 that volumes had fallen relative to the previous year. Indeed, retail sales have now declined in volume terms for the past three quarters in a row for the first time since 2008 and the global financial crisis, and the ABS said the widespread decline in spending last quarter ‘reflects what retailers have been telling us about consumers focusing on essentials, buying less or switching to cheaper brands’.

The ABS has published updated Living Cost Indices (LCIs) for the June quarter of this year. The new numbers show the employee LCI rising 1.5 per cent over the quarter to be up 9.6 per cent over the year, with employee households suffering from the largest cost of living increase across the five household types covered by the data. The annual rate of increase for the employee LCI was unchanged from the March quarter, which was the largest increase in the history of the series. The Bureau pointed to higher prices for insurance, food and housing as contributing to the rise in costs. One key reason that the LCIs are rising at a faster rate than inflation as measured by the consumer price index (CPI) – which rose at an annual rate of six per cent over the June quarter – is that the LCIs include mortgage interest charges, which surged by a huge 91.6 per cent over the year, up from 78.9 per cent in the March quarter.

This week also brought a sequence of releases relating to housing market data, including an update on home values. CoreLogic’s national Home Value Index (HVI) rose for a fifth consecutive month in July 2023, increasing by 0.7 per cent (although this still left the index down 3.4 per cent compared to July 2022). After bottoming out in February this year, following a 9.1 per cent decline from the record high set in April 2022, the national HVI has since risen by a cumulative 4.1 per cent. The combined capitals index rose 0.8 per cent over the month (down 2.7 per cent over the year), with monthly growth rates of one per cent or more in Brisbane, Adelaide and Perth. House price growth in Sydney slowed to 0.9 per cent, down from the 1.8 per cent rate recorded in May this year. CoreLogic pointed to an increase in the flow of new listings as contributing to a moderation in the pace of monthly house price growth - which has eased from 1.8 per cent in May and 1.1 per cent in June - while also noting that overall capital city advertised stock levels remain low at more than 20 per cent below their previous five-year average. The data provider also said the rate of increase in the national rental index (up 0.6 per cent in July) was the smallest monthly gain recorded since December 2021, pulled down by slowing rental growth across regional areas, as well as by a more modest slowdown in capital city rental growth.

The ABS said the total number of dwellings approved in June 2023 fell 7.7 per cent over the month (seasonally adjusted), to be 18 per cent lower compared to June last year. Private sector housing approvals were down 1.3 per cent month-on-month and 17.4 per cent year-on-year, while approvals for private sector dwellings excluding houses slumped 21 per cent in monthly terms and 21.4 per cent in annual terms (although recall that this is always a volatile series given the ‘lumpy’ nature of these residential investments). At the same time, the Bureau noted that the value of residential building approvals fell 4.6 per cent over June. The value of total building approvals was up 1.2 per cent over the month, however, driven by a 7.6 per cent rise in non-residential approvals, which hit a record high.

The ABS also reported that the value of new loan commitments for housing (that is, lending excluding refinancing) fell one per cent over the month (seasonally adjusted) in June this year, to be 18.2 per cent lower than in the corresponding month in 2022. New lending for owner-occupiers was down 2.8 per cent over the month and 19.9 per cent over the year, while investor lending rose 2.6 per cent in monthly terms, but was still down 15 per cent relative to June 2022. According to the Bureau, refinancing activity fell 3.6 per cent over June, but was still 12.6 per cent higher in annual terms and only a little off recent record highs.

Data on the financial aggregates for June 2023 released by the RBA showed credit for housing rising by 0.2 per cent over the month (seasonally adjusted) to stand 7.9 per cent higher over the year. Investor housing credit fell over the month – the first monthly decline since 2020 – while the rate of growth of credit to owner occupiers was unchanged at 0.4 per cent.

Australia recorded an $11.3 billion goods and services trade surplus in June 2023, up from (a revised) $10.5 billion in May. According to the ABS, a near-$1 billion monthly drop in the value of exports was more than offset by a $1.8 billion fall in the value of imports. The fall in exports was largely driven by a drop in exports of other mineral fuels (gas, down more than $0.7 billion), while the decline in imports was mainly a product of a $1.3 billion fall in purchases of non-industrial transport equipment.

Other things to note . . .

• The August 2023 RBA chart pack and the new calendar for Reserve Bank Board meetings in 2024. Note that the latter reflects the shift to just eight annual meetings from next year, in response to the recommendations of the recent review of the central bank.
• The AFR lunches with economist Marian Mazzucato.
• Peter Martin on Australia’s new, formal full employment target.
• Peter Whiteford runs some of the numbers on the opposition’s alternative proposal to the government’s jobseeker payment increase.
• NAB’s latest State Economic Overview.
• Comparing major tax measures during 2022-23 across Australian states and territories.
• Fitch ratings downgraded US long-term foreign currency ratings from AAA to AA+. FT Alphaville on the financial market response.
• A WSJ piece looking at deflation risk in China.
• These estimates of the potential impact of geopolitical fragmentation on international trade reckon that a world split into Western, Eastern and Neutral trade blocs could reduce trade flows by between 22-57 per cent under the most extreme scenarios.
• The Economist lists five things investors have learned this year: The Fed was serious about bringing down inflation; borrowers have proved resilient in the face of higher interest rates (at least to date); the banking turbulence earlier this year did not herald either a wave of financial crises or a long-lasting credit crunch; the share market is once again betting heavily on big tech; and yield curve inversions may not guarantee impending doom after all.
• A much-linked Business Insider piece on Silicon Valley, venture capital and predatory pricing.
• Some sceptical thoughts concerning AI and the automation of work.
• Chatham House on China’s new scientists and Beijing’s growing focus on addressing ‘technological chokepoints’ as part of boosting national resilience.
• On monetary policy and inequality.
• The rise of India as an investment destination.
• This assessment from the Peterson Institute of the efficacy of the oil price cap and the EU embargo on Russia reckons that while the latter has had a significant effect, the impact of the former has been limited due partly to a lack of enforcement and partly to being set too high.
• Two interesting podcast episodes to finish. A conversation with Martin Wolf on the shifts, shocks and fragilities currently shaping the world economy including a case for optimism. And a debate with Daron Acemoglu on innovation and shared prosperity. (Note that Wolf nominates two of Acemoglu’s recent books in the book recommendation section of his discussion).