Bill Evans at Westpac. Property ain’t bottomed.
The Minutes highlight insights into the Board’s more hawkish approach since the release of the December quarter Inflation Report, including an interesting comparison with other central banks.
The Minutes of the Reserve Bank Board’s meeting in February reveal a decidedly more hawkish Board than we saw at the last meeting in December.
Most importantly, the Board only considered two policy options – a 50 basis point increase or 25 basis points. The option to keep rates on hold, as was the case in December, was not even considered.
The reasons behind this pivot in policy approach are set out in the section on Considerations for monetary policy.
Both the wages and inflation reports which the Board received had “exceeded expectations”.
There is now some doubt that inflation has peaked, “Members observed that inflation was likely to have reached its peak in the December quarter, but this could only be confirmed in a few months’ time.”
The Board notes that Australia’s cash rate “was lower than policy rates in many other comparable economies.” This discrepancy has usually been rationalised by Australia’s high level of variable rate debt. But the Board asserts that “after taking into account all the channels for monetary policy transmission, there was little evidence to suggest that the overall impact of monetary policy on activity and inflation in Australia was materially different from elsewhere.”
This observation is based on some work which appears in the recent Statement on Monetary Policy where the various channels of monetary policy are discussed: incentives for saving and investment; the exchange rate; asset prices and wealth; and household cash flows.
From Australia’s perspective the Board also refers to the unusual post pandemic circumstances being faced by Australia households with a proportion of excess savings as a share of disposable income (“larger than in most advanced economies”); tight labour markets; and direct benefits from the reopening of China which may also blunt the direct impact of monetary policy on spending.
In discussing the option of 50 basis points the Board emphasised its concerns about persistent high inflation. But unlike in December it did not note that “the cash rate was not yet at a high level historically”.
The conclusion in favour of the 25 basis points pointed to the uncertainty around the outlook; that monthly meetings allow frequent opportunities to assess; while interest rates have already been adjusted substantially.
While not raised in these Minutes because the “on hold” option was not considered recall the argument against that option that was raised in December, “the Bank’s most recent forecasts had indicated that, even with further increases in the cash rate, as incorporated in the November forecasts, inflation was expected to take several years to return to the target range.“
In the February forecasts a terminal rate of 3.75% was assumed, higher than in November, but the forecast rate for underlying inflation by end 2023 has been lifted from 3.8% to 4.3%, while falling slightly from 3.2% to 3.1% by end 2024; for headline inflation the forecasts were largely unchanged at 4.8% and 3.2%. With the “pause” decision relating back to progress on the inflation front it will be important to gauge developments in the official inflation forecasts.
The Board concluded, “the Board will continue to evaluate developments in the global economy, trends in household spending and unemployment, the evolution of labour costs and price setting behaviour of firms.”
Conclusion
As discussed above, the Minutes confirm other communications from the Bank over the last two weeks that the policy approach has become more hawkish since the release of the December quarter Inflation Report.
Since last October, Westpac has maintained a consistent forecast of 3.85% for the terminal cash rate by May. Until very recently this forecast has generally been above market expectations and those of most analysts.
