By Gareth Aird, head of Australian economics at CBA:
Key Points:
The Minutes today stated that, “the Board has a low tolerance for a slower return of inflation to target than currently expected”.
Incoming data over the next few weeks will make or break the case to lift the cash rate at the November Board meeting.
Specifically, there are three key data releases for markets before the Melbourne Cup day Board meeting (07/11): September labour force survey (19/10), Q3 23 CPI (25/10) and September retail trade (30/10). The inflation report is the most important of these economic publications.
Our preliminary forecast for the Q3 23 CPI is broadly similar to the RBA’s implied profile. We believe this is consistent with monetary policy on hold in November.
But the monthly CPI indicator means there is upside risk to our Q3 23 CPI forecast. As such, we remain of the view that the November Board meeting is ‘live’ and ascribe a 40% chance to a rate increase.
October Board Minutes strike a slightly more hawkish tone:
Last week we categorisedthe November Board meeting as ‘live’. And we ascribed a 40% probability to a 25bp rate increase.
The October Board Minutes confirm that the November Board meeting is ‘live’. Indeed the Minutes today have a slightly more hawkish tone than the September Board Minutes.
The Minutes today confirm that the Board once again considered two options for monetary policy in October: raising the cash rate target by a further 25bpor holding the cash rate target steady. These two options have been considered at each of the last six Board meetings.
We believe the Minutes today were used as a vehicle to keep markets on notice that the tightening cycle is not necessarily over given “the monthly CPI indicator suggested that progress in lowering services price inflation remained slow”.
The Minutes reiterated the RBA’s hiking bias from the September Board Minutes. Namely, that “some further tightening of policy may be required should inflation prove more persistent than expected.”
But importantly today’s Minutes contained a new line, which was hawkish. Specifically that, “the Board has a low tolerance for a slower return of inflation to target than currently expected.”
This aligns with what we stated last week. The RBA is willing to take a little longer than other central banks to return inflation to the target band to preserve as many of the gains in the labour market as is possible.
But the Board are not willing to let inflation sit above the target band for too long. The Board also appears to be placing a little more weight on developments in asset prices for monetary policy.
Specifically, the Minutes note rising home prices “could support consumption by more than currently assumed”. And importantly, “the rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed”.
We don’t subscribe to the idea that the increase in home prices is a sign that monetary policy might be less restrictive than assumed.
Rather we think that the recent lift in home prices primarily reflects the massive imbalance between surging population growth (i.e. underlying demand) and supply.
This mismatch is putting significant upward pressure on rents. And vacancy rates are at record lows in many parts of the country.
Last week we noted that although the unemployment rate had only moved up by 0.2ppts over the past year, other measures of labour market slack had loosed a little more.
Specifically we remarked that the underemployment rate had risen by more than the lift in the unemployment rate. The Minutes today made a similar observation.
This indicates the RBA is considering a broader range of indicators than just the unemployment rate when assessing the rate at which the labour market is loosening.
Attention for domestic market participants now turns to a “fireside chat” with Michele Bullock, Governor, at the AFSA Annual Summit Panel, Sydney tomorrow morning (9.30am AEST).
That said, there may not be a lot in the Governor’s remarks regarding the outlook for monetary policy. The AFSA agenda states that, “Michele will share her insights into the current economic climate with a focus on system stability”.
As such, the Governor is likely to focus on the main themes from the RBA’s October Financial Stability Review.
On the data front, the September labour force survey on Thursday is the key release this week. The consensus expects a lift in employment of 20k and for the unemployment to remain at 3.7% (CBA forecasts a similar lift in employment, but for the unemployment rate to edge up to 3.8%).
Next week the Governor will deliver a speech on Tuesday at the CBA Global Markets Conference, Sydney (7pm AEST – topic not yet announced). And on Wednesday the all-important Q3 23 CPI will print.
We forecast a 0.9%/qtr increase in the headline CPI and a 1.0%/qtr increase in the trimmed mean. The risk sits with a stronger print, particularly on the core measure. We will publish our full CPI preview later this week.
