RBA's sober assessment of the labour market and housing: Westpac's Bill Evans
GUEST OBSERVER
The minutes of the July monetary policy meeting of the Reserve Bank Board confirmed the importance of next week’s June Quarter inflation report.
The key sentences in the concluding paragraph of the “Considerations for Monetary Policy” section state: “The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August Statement on Monetary Policy. This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
The minutes noted that there had been relatively little new data on the Australian economy since the previous Board meeting, most of which had related to labour and housing markets.
On both counts the commentary seemed to be less upbeat. Employment growth was described as having “moderated” and it was noted that the employment growth over the course of 2016 had been driven by part time jobs while full time employment had retraced some of its earlier strong gains.
The minutes have not referred specifically to “the underemployment rate” (those who are unemployed or employed but wanting to work more hours) over the course of this year. In these minutes the Board chooses to highlight that this underemployment rate has not fallen to the same extent as the official unemployment rate indicating that slack in the labour market is greater than implied by the unemployment rate. It is interesting that both these comments put a less positive spin on the labour market than we have seen for some time.
Information on the housing market was also described as mixed with large price increases in April and May in Sydney and Melbourne being followed by only moderate rises in Sydney and falls in some other capital cities in June. Auction clearance rates and sales volumes are described as “lower than a year earlier”.
We are always interested in observations from the minutes on the Banks’ liaison work. In that regard it was noted that non-mining business investment had been growing in some parts of the economy that were less exposed to the decline in mining investment.
However much more importantly, liaison on inflation was less encouraging with the evidence pointing to “ongoing pressure to discount prices in response to increased competition in some retail markets”.
The Bank’s surveys and measures of inflation expectations were noted as having “remained below average”.
The international commentary was balanced, noting that economic growth in China had continued to ease with general weakness in industrial activity being only partly offset by an increase in public sector spending. Commentary around the ‘Brexit’ decision remained balanced with financial markets coping comfortably with the initial volatility while bond rates declined. There are no implied concerns in the commentary around any substantial impact on either the world economy or specifically the Australian economy from those developments.
The key sentence around the Australian dollar that has been recently used in minutes and the Governor’s statements has been repeated: “Members noted that an appreciating exchange rate could complicate the necessary economic adjustments”. However the minutes noted that the Australian TWI was around the levels assumed in the May forecasts. In the forecasts the TWI was assumed at 62.5; reached 63 on the day of the Board meeting and has since risen further to 64.
Conclusion
The minutes clearly leave the door open for another rate cut in August. This will depend upon the June quarter inflation report and of course it is not clear what would be the upper bound for this report to ensure a follow up rate cut.
Westpac’s current forecast for underlying inflation in the quarter is 0.3 percent which would support the need for another move given that underlying inflation would only have risen by 0.5 percent over the course of the first half of 2016 raising a genuine question mark as to whether even the Bank’s current 1.5 percent forecast could be achieved.
A lower result for 2016 would also place the 2 percent (bottom of the 2-3 percent target range) forecast for 2017 in jeopardy.
While the Board and the Governor consistently note that the level of the AUD could complicate the economic outlook there does not appear to be any heightened concern about the current level of the currency indicating that the inflation report will be the dominant issue from the perspective of policy.
Other interesting aspects of the minutes are a more subdued sentiment towards labour markets; no hint of any concerns about the impact of the May rate cut on housing markets; and a further downbeat assessment of the Chinese economy.
At the margin, all these factors slightly improve prospects for lower rates but in the event of an upside surprise on inflation will not be enough to deliver a follow up rate cut.
BILL EVANS is chief economist of Westpac.
