Reserve Bank expects slower bounce-back in economy
Reserve Bank Board meeting

The Reserve Bank (RBA) left the target rates for both the cash rate and 3-year government bond yield at 0.1 per cent.

The RBA continues to purchase government securities at the rate of $4 billion a week.

What has changed since the last Board meeting on September 7?

• NSW, Victoria and the ACT remain in virus lockdowns.

• Employment fell by 146,300 in August. The jobless rate fell from 4.6 per cent to a 12½-year low of 4.5 per cent.

• ANZ job vacancies fell by 2.8 per cent in September but were up 60.8 per cent on the year.

• Retail spending fell by 1.7 per cent in August to stand 0.7 per cent lower than a year ago.

• The NAB business confidence index rose from -7.9 points to -5.3 points in August. And the conditions index rose from +10.1 points to +14.2 points.

• The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 2.0 per cent in September to 106.2.

• The CoreLogic Home Value Index of national home prices rose by 1.5 per cent in September to be 20.3 per cent higher over the year – the strongest annual growth rate in 32 years.

• Council approvals to build new homes rose by 6.8 per cent in August.

• Private sector credit rose 0.6 per cent in August to be up 4.7 per cent on the year.

• The value of all new loan commitments for housing fell by 4.3 per cent in August.

• Over September, global sharemarkets generally slumped. The US Dow Jones fell by 4.3 per cent; the S&P 500 lost 4.8 per cent; and the Nasdaq fell by 5.3 per cent. The S&P/ASX 200 index lost 2.7 per cent.

• The Aussie dollar has broadly held between US71.50-74.50 cents, and is near US72.75 cents currently.
The assessment

• “The Board is 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 wages growth that is materially higher than it is currently.”

Perspectives on interest rates
• The RBA left the cash rate at 0.1 per cent for the 10th meeting after cutting the rate from 0.25 per cent on November 3, 2020. The RBA previously cut the cash rate on March 3 and March 19, 2020, each by 25 basis points. The target rate for 3-year bond yields was left at 0.1 per cent. On November 3, the RBA cut the 3-year bond target from 0.25 per cent to 0.1 per cent. The RBA implemented the 0.25 per cent target rate for 3-year bond yields on March 19, 2020.

Implications

• Other central banks are fretting over rising price pressures causes by fractures in supply chains. But not the Reserve Bank – at least not yet. The RBA believes that the impact of disruptions to global supply chains on overall inflation is “limited”. The RBA wants to see annual underlying inflation lifting from 1.7 per cent to the 2-3 per cent target band. According to yesterday’s Melbourne Institute inflation gauge, that goal may be in sight. But rates won’t be headed higher until wage growth is closer to 3 per cent and the jobless rate is near 4 per cent.

• Higher rates are not expected until 2024 and support for that has come from today’s RBA statement suggesting that the bounce-back in the economy will be slower than earlier in the year. That said, the RBA said the “setback to the economic expansion” from prolonged Delta lockdowns in the September quarter “is expected to be only temporary,” with “many firms seeking to hire workers ahead of the expected reopening in October and November.”

• The RBA Board discussed the Financial Stability Review at today’s meeting. The review will be released on Friday and most interest will be in the assessment of home prices. Rising home prices are positive for household wealth but negative for affordability. The Reserve Bank with other regulators are watching to see if there are risks to the economy from rapid credit growth. Loan serviceability is the key metric being monitored.

The Statement
• Below is the statement from today’s October 5, 2021 meeting (any emphasis added is by CommSec).

Published by Craig James, Chief Economist, CommSec