Happy Aussies, Reserve Bank on inflation watch: CommSec's Craig James

Happy Aussies, Reserve Bank on inflation watch: CommSec's Craig James
Happy Aussies, Reserve Bank on inflation watch: CommSec's Craig James

GUEST OBSERVER

The ANZ/Roy Morgan consumer confidence rating rose by 0.3 percent to a 7-week high of 118.2 in the week to November 13.

Confidence remains above the average of 113.0 since 2014.

The minutes from the November 1 Board meeting shows that the Reserve Bank has become more alert to inflation risks.

The consumer confidence figures have implications for finance providers, retailers, and companies dependent on consumer and business spending. The Reserve Bank Board minutes provides guidance on interest rate settings.

What does it all mean?

Aussie consumers are unfazed by the US election result. Consumer confidence edged to 7-week highs in the latest week, no doubt boosted by strong gains on the Australian sharemarket late in the week. Interestingly respondents believe that the economic outlook over the medium term has improved.

There is a clear change in the Reserve Bank’s attitude to inflation. The latest Board minutes highlight the recent lift in commodity prices as well as perceptions that economic growth for advanced nations could exceed “potential growth”. As such the Reserve Bank concludes that “risks to the global inflation outlook were more balanced than they had been for some time.” Similarly Board members believe that Australian underlying inflation is “expected to return to more normal levels over time.”

Admittedly the Reserve Bank isn’t flashing warning signs on growth and inflation. But it should also be noted that in the period since the Reserve Bank Board meeting there has been the election of a new US President with growth-focussed economic policies. Metal and mining prices and bond yields have soared.

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Happy Aussies, Reserve Bank on inflation watch: CommSec's Craig James

Simply interest rate settings are likely to remain stable until well into 2017.

What do the figures show?

Consumer confidence

The ANZ/Roy Morgan consumer confidence rating rose by 0.3 percent to 118.2 in the week to November 13.

Confidence is up 2.0 percent over the year and above the average of 113.0 since 2014.

Two of five components of the index rose in the latest week.

  •  The estimate of family finances compared with a year ago was down from +11 to +10; 
  •  The estimate of family finances over the next year was down from +28 to +27;
  •  Economic conditions over the next 12 months was up from +5 to+6;
  •  Economic conditions over the next 5 years was up from +10 to +13;

The measure of whether it was a good time to buy a major household item was steady at +35. In addition the inflation expectation 2 years ahead rose from 3.8 percent to 3.9 percent.

Reserve Bank Board minutes:

“Members noted that assessing conditions in the housing market had become more complicated. While overall conditions had eased relative to 2015, some indicators had strengthened over the previous few months. In particular, housing price growth had picked up noticeably in Sydney and Melbourne. However, housing turnover and growth in housing credit both remained lower than a year earlier, consistent with the supervisory measures that had been taken to tighten lending standards and the more cautious attitude to lending in certain segments. In addition, a considerable supply of apartments is scheduled to come on stream over the next few years, particularly in the eastern capital cities, and growth in rents in the September quarter was the slowest for some decades.”

“Considerable uncertainty remained about the strength of labour market conditions and the implications for labour cost growth.”

 “Members observed that some indicators of domestic inflation cost pressures, such as growth in the wage price index, had stabilised, albeit at low levels, and that underlying inflation was expected to return to more normal levels over time. The overall assessment was that the risks around the inflation forecast were broadly balanced.”

“Higher commodity prices and expectations that growth in the major advanced economies would exceed potential growth suggested that the risks to the global inflation outlook were more balanced than they had been for some time.”
 
“Members commenced their discussion of the domestic economy by considering how outcomes over recent years had differed from earlier forecasts, noting that the differences for key variables, including inflation, the unemployment rate and GDP growth, had been modest by historical standards.”
 
“Members noted that there was significant uncertainty about the outlook for consumption growth given uncertainty about households' expectations of their income growth and the influence of these expectations on their spending and saving decisions. This was particularly pronounced for households with significant debt.”
 
What is the importance of the economic data?
 
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.
 
Could the next move in interest rates be a rate hike rather than a rate cut? It’s important not to get too far ahead of ourselves. Inflation is still historically low. And while there is speculation of growth-focussed policies in the US, they haven’t been fleshed out. However you get a sense that inflation has reached an inflexion point. 
 
Craig James is the chief economist at CommSec.
Tags: 
Interest Rates Reserve Bank

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