Reserve Bank: Waiting for July

Reserve Bank Board meeting

Interest rates: The Reserve Bank (RBA) has left the target rates for both the cash rate and 3-year government bond yield at 0.10 per cent and maintained the current pace of bond purchases.

What has changed since the last Board meeting on May 4?

• The Wage Price Index (WPI) rose by 0.6 per cent in the March quarter after a similar rise in the previous quarter. Annual wage growth rose from a record (23-year) low of 1.4 per cent to 1.5 per cent.

• Employment fell by 30,600 in April after rising by 77,000 in March. The unemployment rate fell from 5.7 per cent to a 13-month low of 5.5 per cent. The underemployment rate fell to 7.8 per cent – a 7-year low.

• The skilled internet job vacancies index hit 12½-year highs in April.

• ‘Preliminary’ retail spending rose by 1.1 per cent in April to stand 25.1 per cent higher than a year ago.

• The CoreLogic national home value index lifted 2.2 per cent in May to be up 10.6 per cent on the year.

• The NAB measures of business conditions and confidence hit record highs in April.

• The Westpac-Melbourne Institute Consumer Sentiment index eased 4.8 per cent in May from 11-year highs.

• Council approvals to build new homes fell by 8.6 per cent in April but were up 39.2 per cent on a year ago.

• Private sector credit (effectively outstanding loans) rose by 0.2 per cent in April after rising 0.4 per cent in March. Annual growth lifted from 1.0 per cent on the year (the weakest annual growth rate in 11 years) to 1.3 per cent.

• Over the full twelve months to April the budget deficit was $177.1 billion or 8.9 per cent of GDP. The budget deficit peaked in February and has fallen $26.5 billion in two months.

• The value of new loan commitments for housing rose by 5.5 per cent to a record high $30.227 billion in March.

• In May, the US Dow Jones index rose 1.9 per cent; the S&P 500 index lifted 0.6 per cent; but the Nasdaq index lost 1.5 per cent. The S&P/ASX200 index rose 1.9 per cent and closed at record highs on May 28.

• The Aussie dollar has hovered near US77-78 cents over the past month.
The assessment

• The Reserve Bank (RBA) Board left its policy settings unchanged at its meeting today, retaining its forward guidance on monetary policy. The Board had already signalled at its previous meeting on May 4, and in its minutes released later, that economic data releases and financial conditions will be key factors in determining policy decisions.

• Of course, the RBA’s overriding goals are to achieve maximum or full employment and for core or trimmed mean inflation to be firmly imbedded in its 2-3 per cent target range – something it’s not expecting to occur “until 2024 at the earliest”. That said, the Board reiterated that “progress in reducing unemployment has been faster than expected” with “Job vacancies at a high level”, but countered “inflation and wage pressures are subdued.”

• The first item on the Board’s agenda on July 6 will be addressing the its 3-year government bond yield curve target. While a shift to the November 2024 bond is possible, Commonwealth Bank (CBA) Group economists expect the RBA to keep the yield curve target pegged to the April 2024 bond and to extend the asset purchase program by another $A50 billion over six months. Of course, this keeps a lid on borrowing costs for households, businesses and the government, supporting cash flows, balance sheets, hiring and investment as the economy recovers.

What are the implications of today’s decision?

• Attention now turns to tomorrow’s National Accounts with CBA Group economists expecting March quarter economic growth (real GDP) to increase by a strong 2 per cent, bouncing-back to above pre-Covid levels, up 1.1 per cent over the year.

• The Reserve Bank Board noted in its statement, “The economic recovery in Australia has been stronger than expected and is forecast to continue.” But the recent run of Aussie economic data has been a little mixed following the JobKeeper expiry in late March. Employment declined in April and weekly measures of payroll jobs have softened with the seasonal impact of the Easter and Anzac Day holidays also likely playing some part in job losses. The property market is booming and the Aussie sharemarket is straddling record highs, supporting consumer confidence. But an extended virus lockdown in Victoria, still-slow national Covid-19 vaccine rollout, ongoing trade tensions with China and “labour shortages in some parts of the economy” all present near-term downside risks to the mostly positive economic outlook.

Published by Ryan Felsman, Senior Economist, CommSec