New RBA Governor, Same Rate Pause

My apologies for a shorter note than usual, as I have been on the road all week. My appreciation goes out to everyone who was able to attend one of this week’s various events in Western Australia and to those who were able to join me online for my economics webinar. Thank you all for your time.

RBA leaves cash rate target unchanged at 3 October 2023 meeting

This week’s RBA Board meeting marked the first for Michele Bullock in her new role as central bank governor. It was a case of new governor, same policy as the cash rate target was left unchanged at 4.1 per cent for a fourth consecutive month. The decision to leave things as they were was what financial markets, economists and last week’s analysis had all anticipated, and for her debut monetary policy meeting in charge, Governor Bullock delivered a dose of continuity as the central bank continued to signal that it thinks the disinflation process remains on track. In a reprise of previous comments, the accompanying statement noted:

‘The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast period and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong, and the economy is operating at a high level of capacity utilisation, although growth has slowed.’

Any limited uncertainty over this week’s policy decision had related to the uptick in the August monthly CPI indicator reading, as higher petrol prices saw the headline rate accelerate from 4.9 per cent in July to 5.2 per cent. The statement did reference the August result, remarking:

‘Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly, and fuel prices have risen noticeably of late. Rent inflation also remains elevated.’

But it then went on to state that the RBA’s ‘central forecast is [still] for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.’  As we argued last week, there just wasn’t enough in the August reading to warrant a shift in policy this month.

Granted, this week’s dose of financial market turmoil (US bond yields jumping to their highest level in 16 years, the oil price tumbling by US$5/barrel in one day) reminded yet again that the outlook is unusually uncertain now. And in that context Governor Bullock also signed off with the familiar warning that the RBA could yet tighten further should the data flow warrant it, later citing global economic developments, trends in household spending, the labour market and inflation as key variables to follow:

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

Overall, then, little has changed in our understanding of where monetary policy is at meaning that the story of the first policy meeting of the new regime was mostly a case of, ‘Meet the new boss, same as the old boss.’

What else happened on the Australian data front this week?

The ABS said that Australia’s goods and services trade surplus rose by $2.4 billion to $9.6 billion in August 2023.

The Bureau also reported that its monthly Household Spending Indicator rose 4.8 per cent over the year in August this year (current price, calendar adjusted basis). According to the ABS, an increase in spending on transport drove the rise, reflecting a combination of higher petrol prices and spending on holiday travel and public transport. Notably, while spending on non-discretionary goods and services rose 9.1 per cent, spending on discretionary items was flat.

The CoreLogic National Home Value Index (HVI) rose for an eighth consecutive month in September 2023, climbing by 0.8 per cent over the month to be up 3.9 per cent over the year. The HVI has now risen 6.6 per cent from its January 2023 trough. Home values are now back to just 1.3 per cent below the record levels they reached in April 2022, before the RBA started tightening monetary policy last May.

The ABS said that the total number of dwellings approved rose seven per cent over the month in August 2023 (seasonally adjusted) but was down 22.9 per cent from August 2022. Approvals for private sector houses rose 5.8 per cent month-on-month and fell 15.2 per cent year-on-year while approvals for private sector dwellings excluding houses rose 9.4 per cent month-on-month and slumped 34.1 per cent year-on-year.

Also according to the Bureau, new loan commitments for housing rose 2.2 per cent over the month (seasonally adjusted) in August 2023 but fell 9.4 per cent in annual terms. Lending to owner-occupiers was up 2.6 per cent in monthly terms and down 12.5 per cent on an annual basis, while the corresponding changes for lending to investors were a 1.6 per cent rise and a three per cent fall, respectively.

The ANZ-Roy Morgan Consumer Confidence Index rose by 1.8 points in the week ending 1 October 2023 to an index reading of 78.2 and therefore continues to languish below the 80 index level. Weekly inflation expectations slipped back to 5.2 per cent.

ANZ-Indeed Australian Job Ads fell 0.1 per cent month-on-month in September this year. Job ads are now down 8.2 per cent from their September 2022 peak but are still 51.4 per cent higher than pre-COVID levels. Over the past three months, the Job Ads series has risen 2.2 per cent, led by education and health care.

Other things to note . . .

• The October 2023 edition of the RBA Chart Pack.
• The September 2023 edition of Resources and Energy Quarterly (REQ) forecasts that Australia’s resource and energy export earnings will decline from a record $467 billion in 2022-23 to $400 billion in 2023-24 due to softer world demand and rising global supply. The REQ sees lower prices leading to LNG earnings falling by around $21 billion from 2022-23’s record high of $93 billion, the value of thermal coal exports dropping by about $30 billion and metallurgical coal exports declining by $21 billion.
• From Jobs and Skills Australia, the inaugural Jobs and Skills Report and the 2023 Skills Priority List. The latter finds that 36 per cent of assessed occupations are in shortage.
• A Productivity Commission submission on negotiating modern trade and investment agreements.
• Peter Martin considers the possibility of a Melbourne Cup Day rate hike.
• The Economist magazine says the surge in global bond yields threatens trouble.
• Related, in the WSJ Grep Ip reckons that in a world of higher interest rates, investors will care more about the size of budget deficits.
• On the relationship between corporate taxation and business investment, IMF and OECD economists argue that while lower corporate tax rates can still support business investment, the ‘bang for the buck’ of tax adjustments may have fallen, and the details of the tax system matter.
• Ahead of the IMF and World Bank meetings, the IMF has published some of the chapters from its upcoming October 2023 flagship publications. From the World Economic Outlook (WEO), there are chapters looking at expectations, inflation and monetary policy and fragmentation and disruption to global commodity markets. From the Global Financial Stability Report, a chapter on private climate finance in emerging market and developing economies. Finally, the Fiscal Monitor considers fiscal policies in a warming world. This blog post summarises the key arguments of the fiscal piece, arguing that if countries want to rely only on spending measures to drive climate policy, the cost could be an increase in debt of as much as 45 to 50 per cent of GDP by mid-Century. The Fund reckons carbon pricing would help. The full WEO forecasts will be published on 10 October.
• Also from the IMF, a new working paper looking at the differential impact of Artificial Intelligence (AI) on labour markets in advanced and emerging economies.
• A new World Bank economic outlook for East Asia and the Pacific. The Bank has also published its South Asia development update.
• On Chinese economic growth.
• This issue of the BIS Bulletin looks at changes in global value chains, reporting that recent data suggests a lengthening in chains, particularly for China supplier-US customer relationships, where firms from other jurisdictions (especially from Asia) have joined the supply chain, indicating that supply chains have been redirected through other Asia-Pacific economies, particularly in the IT sector.
• A new eBook on geoeconomic fragmentation.
• Tales from the demographic future? Japan’s toddler superstar.
• This piece from NY Mag reckons Sam Altman is the Oppenheimer of our age.
• An essay from Scientific American claiming that we’ll never live in space.
• The FT’s unhedged podcast on the increasingly odd bond market.