This morning has brought another addition to what in recent times has become a pretty regular drumbeat.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.50 per cent.
That was from a land down under as the Reserve Bank of Australia continued its sequence of interest-rate rises. That was the tenth rise in a row and it seems to have settled into a 0.25% beat. In itself the ten rises in a row beg the question of why it did not do more earlier? The first component of an answer is that back in the day the RBA was confident it would not have to do anything at all.
Reserve Bank governor Philip Lowe, making his first appearance before a Senate estimates hearing, was asked by the Greens’ Nick McKim whether he owed an apology to the hundreds of thousands of Australians who took out mortgages over the past two years on the understanding interest rates would not increase until 2024. ( Sydney Morning Herald)
As you can see the Forward Guidance that interest-rates would not rise until 2024 has been quite a shocker. Also those who took out variable interest-rate mortgages on the back of central bank advice will have to dig even deeper into their purses and wallets. Also the apology had another kicker.
“I’m sorry that people listened to what we’d said and acted on that, and now find themselves in a position they don’t want to be in. At the time, we thought it was the right thing to do.”
The whole concept of central bank Forward Guidance was that people were supposed to follow it. That mirage has been shattered. Also one might wonder how you end up with an interest-rate of 3.6%? They really did believe that minor interest-rate moves were relevant back in the day.
What caused today’s move?
Actually any explanation is rather thin on the ground but rather curiously they do seem to have provided an explanation for leaving interest-rates unchanged.
Global inflation remains very high. In headline terms it is moderating, although services price inflation remains elevated in many economies.
So the policy is working? Well apparently.
The monthly CPI indicator suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia.
Actually you could easily argue that they are providing an explanation for an interest-rate cut with this bit.
The outlook for the global economy remains subdued, with below average growth expected this year and next……Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. Growth over the next couple of years is expected to be below trend.
I am sure if we look back central banks have used that sort of reasoning for interest-rate cuts. Not perhaps with the current level of inflation but they do not actually point that out. We do get some sort of implied explanation for the rise from this.
The labour market remains very tight, although conditions have eased a little. The unemployment rate remains at close to a 50-year low.
That hits some trouble in the very next sentence and that is before you get to the issue that no-one with any sense takes unemployment numbers too seriously these days.
Employment fell in January, but this partly reflects changing seasonal patterns in labour hiring.
Although those of you who have argued that interest-rates will only rise in response to higher wages will have a wry smile at this bit.
Wages growth is continuing to pick up in response to the tight labour market and higher inflation…….The Board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment.
Having failed to explain why they raised this time around the RBA then decided to suggest it would increase interest-rates again.
The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.
House Prices
Whilst the explanation of why interest-rates were raised is rather lacking we did get an explanation of why it was only 0.25%.
The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.
Followers of my work will be aware of my theme that central banks are obsessed with house prices and we see that the RBA is thinking about them. Plus the negative wealth effects.
There is uncertainty around the timing and extent of the slowdown in household spending.
Which they spell out even more here.
Household balance sheets are also being affected by the decline in housing prices.
Perhaps they were also influenced by this news from Friday.
The number of new owner-occupier first home buyer loan commitments fell to its lowest level since February 2017, according to data released today by the Australian Bureau of Statistics (ABS)……The overall value of new loan commitments for housing fell 5.3 per cent to $22.1 billion in January 2023.
What are house prices doing?
CoreLogic’s Hedonic Home Value Index has recorded its smallest fall since interest rates started rising in May last year, at just 0.1 per cent for February. ( abc)
It seems that the Australian state cannot stop the house price pumping.
Westpac’s economics team noted that the rise in Sydney corresponded with tax changes implemented by the New South Wales government that allow most first home buyers the choice of paying an ongoing land tax rather than a one-off stamp duty, significantly reducing up-front purchase costs.
So far this is the extent of the falls.
With housing prices nationally off just over 9 per cent from their recent peak, according to CoreLogic,
But we do know that more mortgage pain is on the way.
The “fixed-rate cliff” refers to the reset of around 800,000 home loans this year, with many borrowers going from sub-2 per cent fixed interest rates taken out during the pandemic to variable rates around 6 per cent, or even higher. ( abc)
Comment
This was a curious statement from the RBA earlier. They do not seem to have convinced themselves let alone us about the need for this increase. If anything they seem to be chasing their own tail.
It will be some time before inflation is back to target rates.
Although they do inadvertently provide something of an explanation of their own failures.
In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
If only they had done that sort of thing when they were promising interest-rates would not rise until 2024. What we have is an inversion of monetary policy where rather than raising interest-rates ahead of an inflation rise they are following it. With the lags in the process that is a recipe for even more trouble.
As to the use of wages as an excuse for interest-rate rises it crumbles rather quickly. In essence it is below.
Figures from the Australian Bureau of Statistics showed the closely watched wage price index increased by a lower than expected 0.8 per cent through the final three months of 2022. It took the annual rate of wages growth to a 10-year high of 3.3 per cent. ( Sydney Morning Herald )
But it gets really rather torpedoed by this.
But with inflation running at 7.8 per cent, the gap between wages and prices now stands at 4.5 per cent – the largest gap since the bureau started compiling its wage price index in 1998.
Yet another country with real wage falls of 4-5%.
Overall the Aussie Dollar seems to have got the message.
#AUDUSD currently down by 0.83%, trading at 0.66772 level. ( @KlavsGOMarkets )