Reserve Bank minutes highlight uncertainty around the labour market, housing: Westpac's Bill Evans

Reserve Bank minutes highlight uncertainty around the labour market, housing: Westpac's Bill Evans
Reserve Bank minutes highlight uncertainty around the labour market, housing: Westpac's Bill Evans

GUEST OBSERVER

The minutes of the November monetary policy meeting of the Reserve Bank Board provided no real surprises.

This is to be expected given that we have seen the Statement on Monetary Policy only a week or so ago.

The three areas worthy of attention in the minutes are: the Bank’s take on the recent lift in bulk commodity prices; its assessment of the trends in the labour market; and any update on its sentiment towards the housing market.

The commentary around the commodity story appears to be more positive – “the terms of trade had risen for the first time in two and a half years and had been revised higher over the forecast period.” As with most observers of this recent development the minutes emphasise “uncertainty” about the outlook for the terms of trade. However the Board offers no speculation as to the sustainability of these increases.

There is a much longer than normal discussion around the labour market. The Board noted that “the current experience of relatively strong growth in part time employment (compared to full time employment) was unusual insofar as such a pattern was typically associated with rising unemployment rates." The discussion also clarified the Board’s view on the state of spare capacity in the labour market emphasising that it depended up “how many additional hours workers were seeking” which they concluded was not readily available data. The minutes confirmed that the unemployment rate is expected to edge lower although forecasts incorporated a small downward revision to the outlook for employment growth and more than compensated by a fall in the participation rate.

Just as there is uncertainty around the outlook for the labour market, the Board has become more ambivalent around the housing market: “Members noted that assessing conditions in the housing market had become more complicated.… housing price growth had picked up notably in Sydney and Melbourne but turnover had slowed.” The Bank continues to make the statement of fact: “A considerable supply of apartments is scheduled to come on stream in the next few years” but provides no guidance as to its view on the implications for both prices and the medium term outlook for activity. We are, at least, pleased however that the Board recognises that building activity is likely to support growth “for some time yet.”

The views on inflation are more confident. The forecast that underlying inflation will lift from 1½% in 2016 to 2% in 2017 is supported by the key assertions that firstly that the slowdown in labour costs has bottomed out and secondly that the disinflationary effect of retail competition is expected to dissipate. On the other hand, low rental inflation is expected to persist while the inflationary effect of the fall in the AUD appears to have run its course.

Internationally, the turning point in government bond rates is recognised partly because expectations of further increases in asset purchases by the ECB and BoJ have been toned down. (The Board meeting occurred before the US election had taken place).

On the growth front downside risks to the near term outlook for China have diminished although the Board continues to note that longer term risks to China’s economy associated with high and rising debt remain.

The conclusion in the key “Considerations for Monetary Policy” section emphasises the ongoing neutral policy bias.

Conclusion

Westpac has consistently argued that, following the rate cut in August, the Bank was likely to keep rates on hold through-out the course of 2016 and 2017. The risk to that view remains to the downside associated with an unexpected extended deterioration in the labour market. As discussed, the Board is not confident about the outlook for the labour market. The forecast that the unemployment rate will remain steady is qualified by a number of conditions particularly around the assessment that the data for the best measure of spare capacity is “not readily available.”

Our view on the growth and employment outlook is more positive and we expect that the probability of the type of adverse development in the labour market that would trigger a further policy response remains quite low.

While markets have substantially priced out the prospect of rate cuts next year, in line with our view, there is some evidence that they are flirting with the possibility of a tightening in the second half of 2017. From our perspective that prospect is extremely remote, particularly given the inflation outlook and given our own forecasts for economic growth.

BILL EVANS is chief economist of Westpac.

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