Reserve Bank and consumers fixated on petrol: Craig James

GUEST OBSERVER

Simply, the Reserve Bank believes that economic growth and inflation will lift over 2017, ruling out the need to cut interest rates further.

If the forecasts were to change and the Reserve Bank became less positive, rate cuts would clearly be back on the radar screen, but the Bank believes risks are balanced. Rate hikes seem some way off. 

While the economy went backwards in the September quarter, the Reserve Bank swiftly dismissed the data: “This weakness was not expected to have continued into the December quarter and the forecasts for quarterly GDP growth were little changed.”

Consumer confidence eased over the past week with consumers more negative on their finances. In fact the reading on current finances hit a 7-month low in the latest week. Clearly higher petrol prices would have had an impact – petrol recently hit 18-month highs and it is the single biggest weekly purchase by most families. Interestingly though, consumers believe it’s currently a good time to buy a major household item. So consumers are far from glum, just mindful about their weekly budgets.

Inflation expectations of consumers also lifted last week and again the higher petrol price would have been a key factor behind the move.

What do the figures show?

Reserve Bank Board minutes:

Last paragraph: “Taking account of all the information available, including the updated forecasts, an assessment of the risks affecting these forecasts and the level of the cash rate, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

“Labour cost pressures were expected to build gradually from their current low levels as spare capacity in the labour market diminished and the effect of heightened competitive pressures on retail prices eased.”

“there were signs that the significant increase in the supply of apartments had begun to affect prices and rents in Brisbane.”

“The fall in GDP in the September quarter had reflected some temporary factors."

“In considering the stance of monetary policy, members viewed the near-term prospects for global growth as being more positive, although recognised the risks from policy uncertainty in the medium term. Stronger growth had contributed to higher inflationary pressures, including higher commodity prices, which had implications for the future stance of monetary policy in the advanced economies in coming years.”

“The large amount of work in the pipeline was expected to support dwelling investment at high levels over the next year or so, although there was some risk of more cancellations than usual if conditions in apartment markets deteriorated.”

“Ongoing spare capacity in the labour market had contributed to subdued wage pressures, although there were some indications that wage growth had reached a trough.”

“Members noted that developments in China continued to be one of the main sources of uncertainty for the Australian economy.”

“the higher terms of trade represented a boost to national income, which provided some upside risks to the domestic forecasts.”

Consumer confidence

The ANZ/Roy Morgan consumer confidence rating fell by 2.3 per cent to 113.7 in the week to February 19. Confidence is up 0.1 per cent over the year and just above the average of 113.2 since 2014. Three of the five components of the index fell in the latest week:

The estimate of family finances compared with a year ago was down from +10 to +2;  The estimate of family finances over the next year was steady at +26;

Economic conditions over the next 12 months was down from +2 to zero;

Economic conditions over the next 5 years was down from +10 to +5;

The measure of whether it was a good time to buy a major household item was up from +35 to +36.

In addition the inflation expectation 2 years ahead, rose from 4.2 per cent to 4.5 per cent. Inflation expectations have now held above 4 per cent for the past 10 weeks.

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.

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. 

One factor to watch is the oil price, and in turn, the local petrol price. The Reserve Bank says global inflation has moved higher and singled out the oil price as a key influence. At home, the Reserve Bank has also noted that petrol prices had lifted in the quarter after subtracting from inflation “over much of the previous few years.”

At present a stronger Aussie dollar is capping petrol prices and could lead to some relief for motorists in the short- term. 

Craig James is the chief economist at CommSec.