Reserve Bank deflects inflation concerns
Reserve Bank Board minutes; Overseas arrivals/departures; Oil market; Property prices

What happened? Minutes of the last Reserve Bank Board meeting were released.

Also of note: Tourist arrivals and departures surged in April, reflecting the creation of a travel ‘bubble’ between Australia and New Zealand. The Australian Bureau of Statistics reports that Australian home prices rose by 5.4 per cent in the quarter to stand 7.5 per cent higher over the year. The average number of people per home fell by an estimated 2.428 to 2.418 people in the March quarter. The national average petrol price was largely flat last week.

Implications: While it is right for investors to be alert to the risks of higher inflation and therefore higher interest rates, they shouldn’t be alarmed. The pre-conditions for a lift in interest rates are a long way from being achieved.

The Reserve Bank Board minutes are important in gauging policy settings. Movements in the energy prices can affect consumer spending, and in turn, prospects for retailers, Home price data is important for retailers, especially those focussed on consumer durables. Tourism data is important for airlines, hotels, shops and transport operators. Migration data is important for housing markets, retailers and government planners.

What does it all mean?

• The pre-eminent focus at present is inflation. More specifically it is the concern that the current lift in a range of prices will not just be transitory and temporary, and as a result, leads to higher interest rates. Given that the sharemarket is being supported by extraordinarily stimulatory conditions, the risks should be uppermost in investor minds.

• But the Reserve Bank (RBA) continues to deflect concerns about either higher prices or higher wages. A key quote was: “Members noted that the strong focus on cost containment by businesses meant that it would take some time for spare capacity to be reduced and the labour market to be tight enough to generate wage increases consistent with achieving the inflation target.” In addition, the RBA said that the preconditions for higher interest rates is 3 per cent annual growth of wages. At 1.5 per cent currently, wages are well short of the goal.

• Certainly the July RBA Board meeting should be more illuminating about rate hike views and timetables. At the meeting the RBA will decide on the bond purchase strategy and the 3-year yield target. So watch this space.

• There is little to report on the oil/petrol markets. Oil prices remain near the highest levels in two years. OPEC+ is successfully restraining oil supply. At the same time, economies are rebounding as more people get vaccinated, pointing to higher mobility and demand for fuel. The higher fuel prices are supporting energy sectors of global sharemarkets while at the same time restraining the outlook for retailers.

• The value of the Australia-NZ travel bubble is shown in the surge of arrivals and departures in April. Travel stocks will be supported by further advancement of vaccinations, both here and abroad.

What do you need to know?

Minutes of the Reserve Bank Board meeting held on June 1, 2021

• On wages: “Information from the Bank’s liaison program and other surveys indicated that labour shortages were appearing in some parts of the economy. The reduction in access to foreign labour and reduced interstate mobility were cited by some firms as contributing factors. However, firms facing labour shortages were citing a preference for non-wage measures to attract and retain staff, such as one-off bonuses and more flexible working arrangements. Some firms were also opting to ration output because of labour shortages, rather than pay higher wages to attract new workers.”

• On prices & wages: “Members noted that the strong focus on cost containment by businesses meant that it would take some time for spare capacity to be reduced and the labour market to be tight enough to generate wage increases consistent with achieving the inflation target. Moreover, it was likely that overall wages growth would need to be sustainably above 3 per cent to achieve the target, and this is well above the current level.”

• Bond strategy: “Members discussed the key considerations for the decisions to be made at the July 2021 meeting on the 3-year yield target and the government bond purchase program. In discussing these considerations, members noted a return to full employment as a priority for monetary policy that would assist with achieving the inflation target. Consequently, monetary policy would be likely to need to remain highly accommodative for some time yet.”

• Final sentences: “The Board would not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a sustained return to a tight labour market. The Board viewed these conditions as unlikely until 2024 at the earliest.”

Tourism & education – April

• In original terms, overseas visitor arrivals rose by 171.9 per cent in April to 22,610 trips. But April 2021 trips were down by 96.8 per cent when compared with pre-COVID levels in April 2019. New Zealand was the largest source country, accounting for 72 per cent of all visitor arrivals.

• Resident returns – short trips lifted 83.6 per cent in April to 16,990 trips. But April 2021 trips decreased 98.1 per cent when compared with pre-COVID levels in April 2019. New Zealand was the most popular destination country, accounting for 60 per cent of all resident returns.

• Overseas migration data will be released on Thursday.

Weekly Oil Market update

• Last week the key Singapore gasoline price rose by US$1.79 or 2.3 per cent to a 21-month high of US$78.11 a barrel. In Australian dollar terms, the Singapore gasoline price rose by 98 cents or 1.0 per cent to a 17-month high of $103.04 a barrel or 64.81 cents a litre.

• Last week the national average price of unleaded petrol fell by 0.1 cent a litre to 142.3 cents per litre (c/l), according to the Australian Institute of Petroleum. And the national average wholesale (TGP) petrol price was up by 1.1 cents last week to 128.5 cents per litre and stands at 129.4 cents a litre today.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 139.0c/l; Melbourne 134.0c/l; Brisbane 156.4c/l; Adelaide 126.5c/l; Perth 128.3c/l; Hobart 145.2c/l; Darwin 139.9c/l and Canberra 140.6c/l.

Residential property prices – March quarter

• The Australian Bureau of Statistics (ABS) has released its Residential Property Price indexes for the March quarter. The ABS reports that Australian home prices rose by 5.4 per cent in the quarter to stand 7.5 per cent higher over the year. The total value of Australia’s 10.65 million dwellings was a record $8,293.2 billion with the average dwelling price at $779,000. The average price of residential dwellings rose $39,100 in the quarter and number of residential dwellings rose by 44,300.

• CommSec estimates that the average number of people per home fell from 2.428 to 2.418 in the March quarter. The number of homes rose by 87,600 over the past six months while Australia’s population rose by an estimated 45,000.

Published by Craig James, Chief Economist, CommSec