As expected, the Reserve Bank kept monetary policy unchanged at its March meeting on Tuesday, with the cash rate remaining fixed at 0.1%.
The decision to remain ‘patient’ (which is the RBA’s current watchword) saw Governor Lowe’s post-meeting statement elevate the Russian attacks on Ukraine to “a major new source of uncertainty” and when things are uncertain, central banks get very cautious.
The RBA meeting and decision also came as there were more signs the house price boom had peaked with flat or slightly lower growth in the major markets of Sydney and Melbourne in February.
The RBA again ignored the usual conga line of commentators and analysts urging the central bank to look to lift rates sooner than planned because of a strong jobs market and rising inflation – which is being given a kick higher by rising oil and petrol prices in the wake of the Russian invasion of Ukraine.
The Ukraine crisis is complicating the matter for the RBA. Putin invasion has whacked global markets with tough sanctions and surge in some key commodity prices such as oil, petrol and LNG as well as higher coal prices.
That will all mean higher inflation domestically and higher export income for Australia, help maintain our terms of trade at high levels and provide the federal government with higher tax receipts with a rise in nominal GDP.
This is the big positive for Australia and for economic growth.
Financial markets though are volatile and with Russia being isolated financially through sanctions and bans on some of its banks being involved in the key financial transactions communications network, there’s a rising degree of uncertainty about the immediate outlook, especially from higher inflation.
“The prices of many commodities have increased further due to the war in Ukraine. Bond yields have risen over the past month and expectations of future policy interest rates have increased.”
The statement conceded that the Consumer Price Index will rise above the RBA’s 3.25% forecast for “underlying” inflation because of the impact of higher petrol prices.
“The central forecast is for underlying inflation to increase further in coming quarters to around 3¼ per cent, before declining to around 2¾ per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise.
“The CPI inflation rate will spike higher than this due to the higher petrol prices resulting from global development,” the bank forecast.
And while there has been a small recovery in wages growth – the 2.3% rise in the Wage Price Index in 2021 fell far short of inflation and as a result real wages fell sharply after taking into account the 3.5% growth in the CPI last year.
And the RBA Governor again expressed puzzlement as to whether we will see strong growth in wages:
“A further pick-up in wages growth and broader measures of labour costs is expected as the labour market tightens. This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment.”
The statement ended with the now familiar long final paragraph were the reasons for the RBA’s patience were outlined:
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target range.
“There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems.
“At the same time, wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”
The US Federal Reserve won’t be so patient at its meeting in two weeks’ time, but then it faces bigger inflation problems that we do.
Economists were not surprised and the AMP’s Chief Economist still thinks the central bank will lift rates in August for the first time “with the risk being that it comes in June.”
“We remain of the view that jobs, inflation and wages data will come in stronger than the RBA is expecting. The Ukraine conflict has likely added more to the inflation outlook than it will detract from economic activity.
“Likewise, the East Coast floods will also add to inflation and while there may be a brief disruption to economic activity in affected areas this will be more than offset by the clean-up and rebuilding,” Dr Oliver wrote late Tuesday.
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Meanwhile the monthly Corelogic house price report confirmed a noticeable slowing in the pace of growth in February.
CoreLogic data shows house prices in Sydney and Melbourne were flat in February.
Corelogic said the rapid cooling of the housing market is in part due to rising mortgage rates, affordability pressures and the withdrawal of stimulus measures introduced to help keep the economy afloat during the pandemic
Apartment values in Sydney fell 0.3% which dragged overall dwelling values down 0.1%. This was the first decline for the city in 17 months. Melbourne’s apartment prices edged up 0.1%. The strongest price growth over the month was in Brisbane, where house prices jumped 1.9%
Nationally, house prices across the regional areas are rising four times as fast as their capital city counterparts at 1.6% compared to 0.4%. On an annual basis the combined regional areas are up 25.9% compared to 21.8% in the metros.
CoreLogic research director Tim Lawless said housing market growth began winding down in April 2021 as fixed-term mortgage rates began to increase and fiscal support was ending.
“With rising global uncertainty and the potential for weaker consumer sentiment amidst tighter monetary policy settings, the downside risk for housing markets has become more pronounced in recent months,” Mr Lawless said.
He warned that regional housing markets will catch up to the metros as they are not immune from the higher cost of debt as fixed-term mortgage rates rise.
Data meantime from the ABS for home loans in January showed another month of investor driven demand with a rise in total loans of 6.1% to an all-time high of $11 billion.
January made it 15 months of growth in investor home loans and that helps explain how the boom has been continuing, and getting away from first home buyers and people on lower incomes.
The ABS data showed investor loan commitments rose nearly 10% in NSW and 11.1% in Victoria.
But overall, new loan commitments for all homes rose are more sedate 2.6% in the month to a record $33.7 billion, with owner-occupier loans up just 1%. First-home buyer loan commitments fell 6.9% over the month.
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The ABS also released the last partial elements of today’s December quarter national accounts.
An $818 million drop in the size of Australia’s surplus for the quarter will detract 0.2 percentage points from the national accounts while a fall in government capital spending will cut GDP by 0.1 percentage points.
There will also be no contribution from overall government expenditure in the quarter. In the September quarter, government spending added 0.8 percentage points to growth (GDP fell 1.9% in the quarter).
On Monday the ABS said company-operating profits rose by 2% in the December quarter to be 13% up over the year, hitting an all-time high of $478.2 billion (thanks mostly to mining and resources).
Wages and salaries, which takes in the expansion in the labour market and any increases in hours, rose by 1.9% to be 5.5% up over the year. Inventories, which fell in the September quarter, rose by 1.1% and will add a full percentage point GDP in today’s national accounts.
