Cautious optimism reigns at the Reserve Bank

Reserve Bank Board minutes

The Reserve Bank Board remains cautiously optimistic on the road ahead.

The Board continues to rule out tighter monetary policy to stem home prices.

A ‘solid recovery’ in household spending is expected.

Overall analysis

• If there is any criticism of the Reserve Bank (RBA) Board, it is that its views tend to be more optimistic than pessimistic. That observation was made by some observers after the Bank released its last quarterly forecasts made on August 6. But the Bank also has a healthy knack of proving its critics wrong.

• The RBA did temper its views somewhat in response to lockdowns in the south-east, but it continues to be positive about the outlook. Setback to the recovery is just temporary; Aussie household balance sheets had strengthened; inflationary pressures remain contained; and interest rates will remain low for some time yet.

• There are no signs of a tempering of monetary policy views: rates are to stay low until 2024. And the RBA continues to rule out tightening policy to cool the rise in home prices, arguing that it would result in a softer job market and thus slower wage growth, lessening the likelihood that underlying inflation would lift sustainably into its 2-3 per cent target range.

Minutes of the October 5 Reserve Bank Board meeting

• As always, it pays to read the last paragraph of the minutes to gauge policy settings: “The Board remained committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate materially higher wages growth than at the time of the meeting.”

• On home prices, the Board reiterated its position: “…while less accommodative monetary policy would, all else equal, see lower housing prices and credit growth, it would result in fewer jobs and lower wages growth, which would in turn create further distance from the goals of monetary policy – namely, full employment and inflation sustainably within the target range.”

• Ahead of next week’s inflation data the Board said: “Members noted that while disruptions to global supply chains were affecting the prices of some goods, the effect of this on the overall rate of inflation in Australia was limited. Wages growth and underlying inflation were expected to pick up only gradually as the economy recovers.”

• Delta was just a temporary setback to economic recovery but rebound will be slower: “Members also observed that the economic recovery was likely to be slower than in late 2020/early 2021. Much would depend on health outcomes and the nature and timing of the easing of restrictions on activity.”

• The Reserve Bank Board previewed the Financial Stability Review and flagged that they had been in ‘close consultation’ with other regulators, including APRA .

• On the risks posed by rising housing debt the Board noted: “these risks would be best addressed with a serviceability-based macroprudential measure, which would ensure that borrowers would have more income left over after home loan repayments and other expenses.”

• On other options to attend to housing risks: “Other options that could be used to improve borrowers’ buffers would be portfolio restrictions on individual lenders’ shares of lending at high debt-to-income ratios and/or high loan-to-valuation ratios.”

• On the road ahead for the economy: “Information from the Bank’s liaison program indicated that many firms were preparing for the lifting of restrictions, and timely indicators of household spending and hiring intentions suggested the recovery in activity and employment would be well under way by the end of the year.”

• On wages: “Overall, there were few indications from disaggregated wages data or from the Bank’s liaison program to suggest that aggregate wages growth was likely to accelerate sharply in the period ahead.

• On prices: underlying inflation pressures in Australia were more moderate than in other advanced economies. This reflected a range of factors, including the relatively slow rate of wages growth in Australia.

• On household spending: “The lifting of restrictions in New South Wales and Victoria was expected to lead to a solid recovery in household consumption in the December 2021 and March 2022 quarters. This would be supported by high accumulated savings, strong increases in household wealth and a rebound in employment. Even so, households’ consumption of discretionary services was not expected to return to pre-pandemic levels until 2022.”

Published by Craig James, Chief Economist, CommSec