RBA messaging signals early recovering confidence

One of the paradoxes of Australian economic commentary through 2024 has been the stark disconnect between all the attention lavished on what the RBA will or will not do on the monetary policy front, versus the complete absence of any concrete policy action from Martin Place. While analysts have been busy chiding the central bank either for failing to hike rates by enough, or alternatively, for leaving them too high for too long, the RBA Board has simply left the cash rate target unchanged throughout. Trying to get a sense of just when policymakers will finally act to change the status quo means RBA watchers are paying close attention to each new piece of central bank comms. This week was no exception, with the focus on the Minutes from the 23-24 September Monetary Policy meeting of the Reserve Bank Board.

To the extent that there is one, the consensus is that the key message to be derived from the latest Minutes is that the RBA has become somewhat less hawkish. That judgment rests on two features. First, they omitted the previous edition’s guidance that it was ‘unlikely’ that the Board would cut the cash rate target in the near term. And second, they included a review of upside and downside scenarios for the economic outlook that was followed by the balanced judgment that both sets of options were conceivable. These changes suggest an RBA that is moving towards a more neutral policy stance. If so, that messaging would be broadly consistent with myview from mid-year that the next move from Australia’s central bank is likely to be a rate cut in February 2025.

Meanwhile, the prospect of lower interest rates is producing some improvement in consumer confidence. The Westpac-Melbourne Institute survey reported that consumer sentiment in October 2024 had jumped to a two-and-a-half year high, propelled by growing confidence on the part of households that they would not have to weather any further rate hikes. (Although, it is also worth noting that the absolute level of consumer confidence remained quite weak.) Meanwhile, in other positive news on the sentiment front, the latest monthly NAB Business Survey reported increases in business conditions and business confidence for September 2024. Both consumer and business survey results mark an improvement from the previous set of monthly updates, which had reported quite subdued confidence readings.

Australia and the new economics of industrial policy

While monetary policy and interest rates have probably been the key cyclical economic story this year, an important structural story has been the government’s decision to add Australia to the growing list of advanced economies that have bought into the new vogue for industrial policies. On 11 April 2024, the Prime Minister announced that the government would introduce a Future Made in Australia (FMIA) Act. In the May Budget, the Treasurer then introduced a $22.7 billion FMIA package, including some $13.7 billion for production tax incentives. Next week, I will analyse Australia and the new economics of industrial policy in an online seminar. The webinar will be held on Thursday 17 October from 12 to 1pm and I hope readers can join me. You can register here.

Please also join us for this week’s Dismal Science Podcast, where we discuss oil price swings, China stimulus fallout, the RBA minutes and consumer confidence.

Below we dig into the RBA minutes and some of the week’s Australian data releases in more detail, and the regular linkage roundup includes the RBA review of its pandemic-era Term Funding Facility and the BIS on post-pandemic productivity.

RBA minutes report potential scenarios for the economy

The RBA published the Minutes of the 23-24 September Monetary Policy Meeting of the Reserve Bank Board. Assembled Board members decided that the ‘mixed’ nature of the information they had received since their previous meeting had not materially altered their assessment of the economic outlook, and therefore that ‘not enough had changed…to alter their assessment that the current level of the cash rate best balanced the risks to inflation and the labour market’. The Minutes go on to note that the RBA Board ‘discussed scenarios in which future monetary policy might need to be held restrictive for a prolonged period or tightened further.’ Those scenarios included:

• If consumption growth picks up in response to a recovery in real household disposable income through the second half of this year, contributing in turn to stronger labour market outcomes and slower disinflation.

• If the outlook for aggregate supply proves to be more constrained than the RBA currently anticipates – for example, if future productivity growth disappoints to the downside.

• Or if current financial conditions turn out to be ‘insufficiently restrictive to return inflation to target’.

Members also considered scenarios ‘in which future financial conditions might need to be less restrictive than they were at present’. These include:

• If households save a much larger share of incomes than the RBA currently expects, leading to a much weaker economy and more downward pressure on inflation.

• If the labour market weakens by more than the RBA expects, again leading to a faster decline in inflation.

• Or if inflation proves to be less persistent than expected even without weaker than forecast activity, perhaps because rent inflation falls more rapidly, or lower commodity prices materially reduce firms’ costs, or services inflation ease more quickly.

According to the Minutes, members reckon that each of these various scenarios ‘was conceivable given the considerable uncertainty about the economic outlook’ and therefore:

‘…future financial conditions might need to be either tighter or looser than at present to achieve the Board’s objectives.’

That suggests a more neutral view from the central bank regarding the distribution of risks.

The discussion also canvassed the relationship between Australia’s monetary policy settings and decisions by central banks elsewhere in the world economy, making the case that any assumption the RBA will mechanically follow its peers in cutting rates would be mistaken:

‘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 exchange rate could also adjust as interest rate differentials between Australia and other economies evolved.’

As already noted above, RBA watchers reckon the latest set of Minutes is less hawkish, pointing to two supporting pieces of evidence. First, there was that recognition noted above that both upside and downside scenarios for the economy were conceivable. And second, there was no explicit ruling out of the possibility of a near-term rate cut. Previously, the Minutes to the 5-6 August 2024 Board Meeting had reported that:

‘[Members] also agreed that, based on the information available at the time of the meeting, it was unlikely that the cash rate target would be reduced in the short term, and that it was not possible to either rule in or rule out future changes in the cash rate target.’ [emphasis added]

 Instead, the final message this time omitted that additional piece of guidance, stating that:

‘[Members]…affirmed that monetary policy would need to be sufficiently restrictive until members were confident that inflation was moving sustainably towards the target range and, based on the information available at the time of the meeting, that it was not possible to either rule in or rule out future changes in the cash rate target at this time.’

Consumer confidence improves in October

The monthly Westpac-Melbourne Institute Consumer Sentiment Index rose 6.2 per cent to an index reading of 89.8 in October 2024. That means the index is now at its highest level since the RBA’s interest rate tightening phase began two and a half years ago. Westpac said expectations have been lifted by signs of moderating domestic inflation and a receding risk of future rate hikes from the RBA, along with lower interest rates overseas. The Westpac-Melbourne Institute Mortgage Rate Expectations Index (which tracks consumer expectations for variable mortgage rates over the next 12 months) dropped 14.1 per cent this month and is now at its lowest level since the RBA was cutting rates during the pandemic. Just over half of consumers now reckon that mortgage rates will be either unchanged or lower over the year ahead.

Those expectations of lower interest rates mean consumers now feel more upbeat about the economic outlook in general. The ‘economic outlook, next 12 months’ subindex jumped 14.3 per cent, while the ‘economic outlook, next five years' subindex rose 8 per cent in October. Both measures are now above their long run averages for the first time since May 2022. There were also smaller gains for the two ‘family finances’ subindices (both up 2.8 per cent) and the ‘time to buy a major household item’ subindex (up 3 per cent), but all three of these subindices remain below their long-term averages, with the ‘family finances vs a year ago’ reading still stuck deep in negative territory at an index level of 73.8. Meanwhile, consumers views on the labour market have also become more positive, with the Westpac-Melbourne Institute Unemployment Expectations Index falling 6.2 per cent to 129.8 in October, indicating that more respondents now expect unemployment to decline over the year ahead.

Note, however, that despite the positive news in terms of the direction of change in confidence, in level terms sentiment remains weak. At 89.8, October’s index value remains in negative territory and well below the series average of 100.5.

The other regular measure of consumer sentiment – the weekly ANZ-Roy Morgan Consumer Confidence Index – also delivered a positive result. It rose a modest 1.5 points to an index reading of 83.5 in the week ending 6 October 2024. Much of the weekly gain reflected a 7.1-point lift in the ‘current financial conditions’ subindex, which staged a strong rebound from the previous week’s steep 6.7-point fall. Confidence in ‘future financial conditions’ was also up by 3.2 points to the highest level since January 2023. Even so, the overall confidence index continued its extended run below the 85 level for an 88th consecutive week.

Meanwhile, the survey measure of weekly inflation expectations rose 0.3 percentage points to 4.9 per cent.

Business conditions and confidence both up in September

The September 2024 NAB Monthly Business Survey reported that both the Business Conditions and the Business Confidence indices increased by three points last month.

The Business Conditions index rose three points to +7 index points, with gains in all three subcomponents: Trading conditions were up four points to +12 points and both Profitability and Employment were up three points to +5 index points.

The Business Confidence index was also up three points over the month, rising to an index reading of -2 index points. Forward orders were unchanged at -5 index points. Capacity utilisation edged up from 83 per cent in August to 83.1 per cent in September, remaining well above its long-term average.

Price pressures continued to ease last month. Labour cost growth was 1.7 per cent in quarterly terms, down from 1.8 per cent in August and 2.1 per cent in July. Purchase cost growth also moderated, slowing to 1.2 per cent from 1.6 per cent in August and 1.4 per cent in July. Product price growth eased from 0.7 per cent in August to 0.5 per cent in September, while growth in retail prices fell from 1.2 per cent to 0.5 per cent over the same period. With the rate of increase in input prices running ahead of that in output prices, business margins look to be under pressure.

What else happened on the Australian data front this week?

New ABS data on building activity report that the total number of dwelling units commenced in the June quarter 2024 fell 1.1 per cent over the quarter (seasonally adjusted) to be down 3.6 per cent over the year, at 40,293. (As a reminder, the government’s target requires it to build 1.2 million homes by 2029. That would imply an average quarterly construction rate of 60,000.) According to the Bureau, commencements for new private sector houses were up 1.7 per cent in quarterly terms and 2.6 per cent in annual terms at 25,732. But commencements for other residential units fell 7.4 per cent over the quarter and were down 12.3 per cent over the year at 13,756.

The ANZ-Indeed Australian Job Ads index rose 1.6 per cent over the month in September (seasonally adjusted) to be down 19.8 per cent over the year. That follows an upwardly revised monthly fall of 1.8 per cent in August and marks the first increase in the series in eight months. Jobs ads have now fallen 28.1 per cent from their June 2022 peak and are down 15.8 per cent from January this year but are still 14.3 per cent above pre-pandemic levels. ANZ said September’s increase could signal a slowdown in the trend rate of decline in job ads since last year, and with ads up in 75 per cent of occupations (vs half in August), the gains were relatively broad-based. Indeed noted that on a non-seasonally adjusted basis, more than a third of the monthly gain in Job Ads was related to a ramping up in Christmas-related hiring that was broadly in line with similar developments at the same time last year.

Other things to note . . .

• Christopher Kent, the RBA’s Assistant Governor (Financial Markets), gave a speech on A Review of the RBA’s Term Funding Facility (TFF). The TFF was one of a suite of so-called Unconventional Monetary Policy instruments (UMPs) utilised by the central bank during the pandemic. The TFF provided low-cost, three-year funding to banks with an interest rate initially fixed at 0.25 per cent but later lowered to 0.1 per cent in line with a reduction of the cash rate target. The TFF provided a total of $188 billion of funding, equivalent to 6 per cent of the stock of outstanding credit at the peak of use. All TFF funds were repaid on schedule. The total cost to the central bank is estimated at $9 billion or about half a per cent of GDP, mostly because when it started to tighten policy through a higher cash rate target, Martin Place found itself paying banks more interest on the Exchange Settlement balances they held at the RBA than it received from the low fixed rates the banks were paying on the TFF. (By boosting economic activity, there would have been some (hard to quantify) offset benefits for the overall public sector balance sheet via higher tax revenues and lower support payments for federal and state governments.) According to Kent, while the RBA’s review of the TFF concluded it had delivered on its goal of preventing ‘dire economic outcomes’ by lowering borrowing costs, maintaining credit flow to the economy, supporting demand and restoring financial market confidence, there were also lessons to be learned in terms of flexibility, communication, contingency planning, risk management and governance. The full RBA Review of the TFF is available.
• Also from the RBA, Deputy Governor Andrew Hauser gave a speech on Central Banks and the Press. In the subsequent Q&A session, Hauser defended the RBA’s private briefings and gave some thoughts on oil price risk.
• The 2024 Small Business Perspectives Report reckons Australia’s small businesses are struggling to deal with rising energy, rent, insurance and interest costs, while also grappling with workforce shortages, cybersecurity threats and the energy transition.
• Some evidence from the Greater Sydney housing market on the role of negative gearing in shaping investor decisions.
• Related, estimates from the Parliamentary Budget Office (PBO) on the distribution of property tax concession benefits. There are separate estimates of revenue foregone, due to the capital gains tax discount and negative gearing deductions.
• The e61 Institute has an analytical note examining the broader macro implications of growth in the care economy, which now employs 15 per cent of working Australians.
• The ACCC has welcomed the introduction of the government’s new merger reform bill and issued a statement of goals for merger reform implementation, outlining the main changes that business should expect as the new regime rolls out from 1 July next year.
• In the AFR, Tom Switzer looks back to the publication of Hayek’s The Road to Serfdom.
• The Economist magazine is running a series of briefs looking at policy implications of the upcoming US presidential election. To date there have been pieces on world trade, tax, and immigration.
• Barry Ritholz warns, don’t pay attention to US political polls.
• A new edition of the BIS Bulletin analyses productivity in the post-pandemic world, pointing out that with the notable exception of the United States, productivity growth has fallen back to or below pre-pandemic trends. The authors cite persistent structural headwinds including weak investment, ageing populations and trade fragmentation as important explanatory factors. They suggest that US outperformance reflects strong investment linked to business dynamism, greater labour market flexibility and the size and type of US fiscal stimulus in response to COVID-19 (which took the form of direct support to households rather than furlough schemes).
• The World Bank’s latest economic update on East Asia and the Pacific highlights four influences on regional growth which include shifting trade and investment patterns; slower growth in China; higher public and private debt and increasing global policy uncertainty.
• Also from the World Bank, its new Business Ready (B-READY) report. This is the Bank’s revised approach to assessing an economy’s business and investment climate and replaces the old Doing Business project, which was discontinued following controversies over data irregularities and other ethical issues. The first edition of the B-READY report only covers 50 countries, but the Bank says coverage will be widened in future (Australia is expected to be included in next year’s report).
• A new Brookings paper on the economics of sanctions. It was presented as part of the BPEA Fall 2024 conference.
• In the FT, Chris Miller writes on supply chains, exploding pagers and spy chips.
• On war and transnational reshoring. A look at how Indian leather exporters responded to excess demand shock caused by sanctions on Russia.
• Tyler Cowen makes the case for working more hours.
• The latest Grattan Institute podcast asks, should Australia curb negative gearing?
• The Odd Lots podcast takes a deep dive into the ongoing mess that is Intel.
• And the WSJ on how to use AI to build your own podcast about pretty much anything.