The Treasurer’s decision to not extend RBA Governor Philip Lowe’s tenure beyond its mid-September end-date and to appoint Governor the current Deputy Governor, Michelle Bullock, is likely to make no difference to how much further the cash rate will rise in Australia. Also, the changes to the way monetary policy decisions will be decided and communicated announced by Governor Lowe last week also will make no difference to the trajectory of the cash rate. The likelihood remains that there will be one or two more cash rate hikes before Christmas taking the cash rate to a peak of 4.35%, or possibly 4.60%.
Essentially, economic readings relating to the strength of demand, the labour market and remaining inflation pressure in the system will determine likely rate hikes and that will not change in the last two monetary policy meetings (August and September) where Governor Lowe presides or in the remaining monthly meetings through to year-end (October, November and December) where Governor Bullock presides. What remaining untoward strength in demand or inflation remains is unlikely to survive more than the next month or two and requiring no more than one or two rate hikes to batter it down.
Governor Lowe and his successor Governor Bullock have worked closely and seemingly without disagreement on the need to reduce inflation to 2-3% target over a reasonable time frame. From their public comments and speeches over the past year they are in lock step on their views about the need to temper demand and preside over some rise in unemployment in the near-term to ensure a longer-term low inflation environment that provides best opportunity for sustainable growth and low unemployment.
The monitoring of economic reports and surveys and how the strength or otherwise that they show relates to whether the RBA’s economic forecasts are on track or awry will continue to determine RBA rate moves. The RBA will produce its latest quarterly Monetary Policy Statement containing the latest RBA economic forecasts on the first Friday in August, three days after the August policy meeting.
It is worth noting at this point that the calendar for the quarterly Monetary Policy Statement and associated published RBA economic forecasts will not change much when the RBA’s new interest rate setting arrangements (8 policy meetings a year instead of 11 currently) start in 2024. The Monetary Policy Statements will be published as they are currently in February, May, August and November with the only difference being that they will be released together with the policy announcements in each of those months on the first Tuesday.
Returning to the approaching August policy meeting and subsequent Monetary Policy Statement data reports and surveys released over the past month point to another close call on rates and perhaps a slight tweak stronger of the RBA’s near-term demand, labour force and wage growth forecasts, but also slight downward revision to near-term inflation forecasts. Recent data show rising house prices (up more than 1% in July), new home loans (up 4% in May) and even home building approvals (up 20% in May). Retail sales lifted 0.7% in May. Employment rose 75,900 in June and the unemployment rate fell to 3.6% from 3.7% in May. Recent wage deals in the banking sector have been running at 17% over four years.
A saving grace is that annual inflation is falling more than expected helped largely by a global reduction in some food and energy prices. The latest May CPI reading showed a bigger-than-expected fall in annual inflation to 5.6% y-o-y from 6.8% in April and opens the possibility of a sub-6% y-o-y inflation reading later this month when the Q2 CPI report is due. Back in early-May the RBA forecast CPI annual inflation at 6.3% y-o-y in Q2.
The RBA will need to decide at its policy meeting in early-August whether the likely lower annual inflation outcome in Q2 relative to its May forecasts is likely to persist? If the firmer demand, labour force and wage indicators of late continue progress reducing annual inflation could slow or even reverse.
Even if the recent demand blip continues a little while longer, there are reasonably compelling reasons why demand growth should slow again soon. On the housing front, the cumulative effect of rate hikes plus peak fixed-rate mortgage rollovers point to rising distressed home sales over the next few months coinciding with a more normal lift in spring home listings fostered by the recent increases in home prices. Supply of homes for sale will lift, even if only temporarily, taking some steam out of the housing market.
Also, the belt-tightening squeeze on home mortgage payers and renters has further to go forcing lower growth in retail sales.
The labour market may still have the odd strong month ahead, but the combination of softening demand in the economy, higher wage growth and high immigration adding to labour supply point to a rising unemployment rate before long.
The RBA’s dilemma is can it wait for likely evidence of slowing demand and leave the cash rate where it is, or should it nudge the cash rate higher to help ensure that slowing demand occurs? In early August it will be a line-ball call perhaps determined by two economic releases – the July labour force report this week and the Q2 CPI the week after.
If employment rises another 20,000 or more in July with the unemployment rate sitting at 3.6% or falling the pendulum swings in favour of a rate hike as it does if the Q2 CPI report shows annual inflation above 6% y-o-y. The changes announced last week to RBA policy meetings in 2024 and the change of governor in September make no difference to what will influence the RBA to change interest rates and when. That is in the lap of the economic data and surveys and they say we are getting towards the top of the rate cycle, but there could still be one or two more rate hikes to go this year.