CBA’s excellent Gareth Aird on the RBA minutes.
A lot of attention on the role strong population growth will play in the inflation outlook ‑ all eyes now on the Q1 23 CPI
We expected the April Board Minutes to be a low key affair given Governor Lowe delivered a detailed speech the day after the April Board meeting. Recall that the RBA left the cash rate on hold in April, as CBA had anticipated (see here).
But the April Board Minutes contained quite a lot of interesting information. Indeed they were significantly longer than the March Board Minutes (4.7k words in the April Board Minutes as compared with 3.8k words in the March Board Minutes). The Board clearly has a lot it wishes to communicate with market participants at this juncture!
On balance the Minutes today reflect a central bank that believes they will probably increase the cash rate again. But they are not sure that it will be necessary.
The key paragraph that supports this proposition stated, “members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable timeframe.” (our emphasis in bold).
The word “when” could have been replaced with “if” had the Board been of the view that another rate increase was less likely than not. But reading between the lines the RBA is likely to still have one more 25bp hike in their central scenario. The timing of that hike, however, is not certain. Indeed another rate hike is not guaranteed and it is very plausible that the current cash rate of 3.6% is the peak in the cycle.
The Board will have an updated set of economic forecasts at the May Board meeting (2 May). This means that the Board will consider the case to increase the cash rate by 25bp or leave the policy rate on hold. Put simply, the May Board meeting is ‘live’.
The RBA’s updated inflation forecasts will be a very critical input as to whether the cash rate is increased at the next Board meeting. The new cut of inflation forecasts will be in part influenced by the upcoming Q1 23 CPI (more on that below). And the Bank’s assessment of the economic outlook will also be very important.
On that score, the Board views the stronger than expected growth in population as putting upward pressure on consumer prices: “members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period.”
We agree with that assessment. However, we believe strong growth in population puts downward pressure on wages growth as the supply shock to the labour market is a greater force than the boost that strong population growth provides to aggregate demand. We take this view because a lot of the surge in population has come from an influx of foreign students. Many of these student will want/need a job. But they generally have a limited amount of money to spend on discretionary goods and services.
The Board somewhat acknowledged this idea in the statement that, “higher immigration might reduce wage pressures in industries that had been experiencing significant labour shortages”.
The Board appears more assured that stronger population growth will be inflationary than it is convinced more workers will dampen wages pressures a little. That said, the RBA is clearly cognisant that the overall impact of stronger than expected growth in population could further reduce real wages growth and by extension the purchasing power of households.
This puts the RBA in somewhat of a conundrum in its policy setting process from here given the Board is still seeking to, “navigate the narrow path of bringing inflation down in a timely way while keeping the economy on an even keel”.
The RBA has likely changed their assessment on the outlook for home prices, in part because of stronger than expected population growth. The Minutes noted, “there were already signs that the recent fall in housing prices might be smaller and more short‑lived than expected”.
We agree and will be revisiting our home price forecasts over coming weeks (we had expected a peak to trough fall in home prices of ~15%).
In some sense the Minutes today are posing a bigger question to the Commonwealth Government and other policymakers – what is the role that strong population growth plays in the economy? And is that the right course to pursue, particularly in the current environment.
Turning to the May Board meeting specifically: Two key pieces of domestic economic information between the April and May Board meetings will have a big bearing on the policy decision at the May Board meeting (in addition to the RBA’s updated inflation forecasts). One of those releases has already printed (the March labour force survey). And the other is due on 26 April (the Q1 23 CPI). The CPI is the more important release of the two.
The March labour force survey was a strong set up numbers (see here). The key metric in that report was the unemployment rate, which held steady at 3.5%. On that measure alone it suggests that the labour market has not loosened.
But the underemployment rate increased by 0.4ppts in March which means the broadest measure of labour market slack, the underutilisation rate, lifted. This means that the labour market has loosened a little, but perhaps not sufficiently so for the RBA to be comfortable that wages growth will not further accelerate. Our long held view has been that a wages price spiral will not occur in Australia and that remains the case.
So there is only one key data release to print before the May Board meeting – the Q1 23 CPI (26/4). We will publish our full CPI preview within the next two days. The already released monthly CPI data for January and February suggests headline CPI will come in a little below the RBA’s implied profile. But there is less certainty around where the more important trimmed mean will print relative to the RBA’s expectations. We will publish our point estimates for both headline and core CPI in our full preview.
At this stage we have one more 25bp rate hike in our base case to be delivered at the May Board meeting. But that call is line ball at this stage and we will firm up our call after the Q1 23 CPI data is published.
We continue to look for rate cuts in late 2023 as we believe inflation will fall more quickly than the RBA currently anticipates. And that the unemployment rate will lift more sharply.
