Today our focus switches to a land down under as we note that its central bank has again raised interest-rates.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.10 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.00 per cent.
So the initial point is that 0.25% has become the new standard for the Reserve Bank of Australia confirming what we thought last time around. From November 1st.
The basic point is that one of the stronger world economies is in the midst of what has become called the “pivot” on interest-rates.
So we have one of the stronger world economies which in interest-rate terms has dropped from striding out to a jog. Also they show that this has been something of a shambles by ending up with an interest-rate of 3.1% long after even they must have lost faith in moves of 0.1% being significant.
That point is reinforced by this.
Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role…..
A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter.
As you can see there is a around 5% gap between interest-rates and inflation and although they would be hoping no-one would put it like this. It was the RBA which did it.
Returning inflation to target requires a more sustainable balance between demand and supply.
You do not need to take my word for it as here is the RBA from a year ago.
The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target.
Indeed they made a special point of saying there was no inflation in prospect.
While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.
As to interest-rate increases well they were apparently a long way in the distance. The emphasis is mine.
The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient.
I hope that very few Australians took any notice of this poor piece of Forward Guidance.
Fantasy Time
If Australians are finding things difficult to afford then they can retreat to the world of central banking economic models where everything is just fine and dandy.
Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.
As Earth Wind & Fire so aptly put it.
Every man has a place, in his heart there’s a spaceAnd the world can’t erase his fantasiesTake a ride in the sky, on our ship, FantasyAll your dreams will come true, right away.
Wages
The lack of wage growth they were confident about last year has morphed into this.
Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.
House Prices
In the end central banking policy invariably comes down to this. Or as I put it on November 1st, Australia is pivoting on interest-rates because of fears about house prices. Here is how the RBA puts it.
The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments.
Not that much of a lag though, if Reuters are correct.
(Reuters) – All of Australia’s “big four” banks said on Tuesday they will raise their home loan rates by a quarter-point, passing on the central bank’s eighth rate hike in as many months to their customers in full……..
The top four lenders, the Commonwealth Bank of Australia, National Australia Bank and Australia and New Zealand Banking Group’s will hike their rates from the end of next week, while Westpac Banking Corp’s hike will be effective December 20, the banks said in separate statements.
As to what house prices are doing the Australian Broadcasting Corporation is on the case.
Property data firm CoreLogic said home values across the country fell a further 1 per cent in November from a month earlier, with the median home price now at $714,475.
Distributed like this.
Brisbane and Hobart led the falls (-2 per cent), followed by Sydney (-1.3 per cent), Canberra (-1.2 per cent), Melbourne (-0.8 per cent) and Adelaide (-0.3 per cent).
Perth was flat, while Darwin values rose 0.2 per cent.
There may well be a challenge next year as those who were sensible and ignored the Forward Guidance of the RBA also begin to get caught by its interest-rate rises.
We’re still going to see a real test to the market in 2023, when a lot of people who secured long, low-mortgage rates on fixed terms are rolling off into an environment where average mortgage rates might be between 5-6 per cent.”
That means that mortgage rates in Australia will be lower than in the US but pretty similar to where I expect the UK to be.
In case all of this is just too depressing for a modern central banker they can still cling to this.
CoreLogic’s data also shows housing values across most of Australia have moved through a peak following a massive rise in dwelling values since the start of pandemic.
“So nationally, home values are still 17 per cent higher than when they were at the onset of COVID-19.
So they can still claim wealth effects.
Comment
If we return to the issue of the failure of Forward Guidance from the RBA then its review last month put things like this.
The RBA attracted extensive criticism when the cash rate was increased much earlier than implied by the conditional time-based guidance.
The Daily Telegraph has a different perspective on it.
Mr Lowe first flagged that the RBA was not “not expecting to increase the cash rate for at least three years” on November 3 2020, in a prepared statement after the board’s decision to lower the cash rate to 0.1 per cent.The following month a record 46,921 fresh loans worth a combined $22.3 billion were written nationwide, according to Australian Bureau of Statistics figures, up from 40,328 in the month before his flawed forecast. More than 85 per cent of the loans were variable-rate, ABS data shows.The December record was then trumped in March 2021, after Mr Lowe used a speech to advise would-be borrowers “the cash rate is very likely to remain at its current level until at least 2024.”More than 48,000 mortgages were struck in that month – a level that has not been breached since. About four-fifths of these loans were variable-rate.
They should have been reading me! They would then know not to rely on the words of central bankers.
So we have an economy where interest-rates have been raised but the central bank is increasingly getting cold feet about the impact of them on house prices. Especially as it encouraged the housing market. Whilst individuals should take responsibility for their actions it is also true that this was presented as expert guidance as opposed to the out turn of it being misleading.