The week just gone has been one of a series of 0.25% increases in interest-rates around the world From the heights of the US Federal Reserve on Wednesday and the ECB yesterday to the Norges Bank. However this morning the Reserve Bank of Australia has published its Monetary Policy Statement this morning which gives us an opportunity to look at its rise from the beginning of the week.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.85 per cent. It also increased the rate paid on Exchange Settlement balances by 25 basis points to 3.75 per cent.
Whilst looking at Australian specifics the Statement opens with what its the critique of central banking at this time.
Inflation has passed its peak in Australia but
remains very high. Headline inflation declined to
7 per cent in year-ended terms in the March
quarter; trimmed mean inflation was
6.6 per cent over the same period.
They told us that there would be no inflation meaning that their response has been much too late which they implicitly confess below.
Inflation is expected to return to the
2–3 per cent target range, but it will take some
time. The central forecast is for headline inflation
to decline to 4½ per cent by the end of
2023 and to reach 3 per cent by mid-2025.
The “but it will take some time” is their version of my point that interest-rate moves take 18/24 months to fully impact on the economy. Which is why you need to move early. Also they are now all obsessing over services inflation which would not exist if they had not been asleep at the wheel.
Somewhat offsetting this, cost
pressures (both labour and non-labour) and
strong demand continued to contribute to
strong price increases for many services.
There is a deeper more insidious side to this as again we see something that has become a generic.
The labour market remains tight
So tight in fact that real wages are falling!
A range of timely indicators suggest
private wages growth was running at around
3½ to 4 per cent in the March quarter.
With inflation at 7% then we are seeing real wages fall at an annual rate of around 3%. If you think of it logically then an objective of central banks should be to increase real wages to make workers better off. But instead they are in a panic over a perfectly natural response to inflation having soared. In fact according to their own forecast wages growth will be quite moderate in the circumstances.
The Wage Price Index is expected
to peak at around 4 per cent later this year and ease a little after that.
So after a period of falls on real wages they are predicting stagnation which hardly seems something to obsess over to me. Actually if labour markets are as tight as they claim then the path for real wages is indeed troubling but in the opposite direction.
Unemployment
If we stay with the labour market then we see that the RBA has plans to end the “tight” conditions.
Consistent with the outlook for slower economic
growth, the unemployment rate is expected to
start rising later this year and reach 4½ per cent
by late 2024.
So a rise of 1% in the unemployment rate. If we factor in the falls in real wages we are seeing a long-term cost to their actions in the pandemic.
House Prices
If you think that central bankers obsess over wages then wait until we get to house prices.
and declines in housing prices over the past year have reduced household wealth
They seem much more bothered by the falls in house prices than the falls in real wages. With real wages falling and mortgage payments rising this is hardly a surprise.
Demand for new housing has
been weak recently and borrowing for housing
has slowed.
The latter was true although this morning’s release provided some food for thought.
The number of new owner-occupier first home buyer loan commitments rose 15.8 per cent in March 2023 (seasonally adjusted), after reaching a five-year low in February, according to data released today by the Australian Bureau of Statistics (ABS).
The UK saw a rise in house prices in March so is there something going on? Of course it is not spring in a land down under but maybe unlike banks home buyers are in fact more resilient that it first appeared. On this road it is hard not to wonder if house prices are what are the main guide for interest-rates?
Moreover, there are signs that asset
prices – including the exchange rate and
housing prices – have been responding to the
expectation that interest rates may not increase
Also considering that monetary policy has been set for at least the last decade on higher house prices being good for the economy via Wealth Effects this sentence is rather significant.
In addition, housing prices have stopped
falling at a national level, implying that the drag
on consumption from declining wealth could be
smaller than previously assumed.
Inflation Expectations
These are apparently under control.
So far, medium-term inflation expectations
remain consistent with inflation returning to
target.
Unlike actual inflation.
On current forecasts, inflation
is not expected to return to target until
mid-2025.
Indeed reality is a real problem for central banker inflation expectations as this from the November 2021 statement shows.
In the central scenario, trimmed mean inflation is forecast to be 2¼ per cent at the end of 2022 and around 2½ per cent by the end of 2023.
Have firms made excess profits?
This was an interesting topic for the RBA to pick up as there has been a lot of debate about possible profiteering, or as the text bools would put it,excess profits.
The Australian National Accounts data on
private non-financial profits indicate that the
aggregate profit share of income has grown
strongly since the start of 2021.
But apparently it is all those nasty foreigners or something like that.
However, this largely owed to strong growth in mining
sector profits, which were driven by
commodities prices set in global markets,
based on the balance of global supply and
demand………A large portion of the increase in mining
sector profits has reflected higher iron ore
and base metals prices over this period.
Apparently contributing to world inflation ( and then feeding back to Australia ) is just fine.
as a large share have either been remitted to foreign shareholders or retained as windfall tax revenues by
Australian governments.
Plus one of the areas of most concern the answer seems to be yes.
While higher energy prices have
simultaneously boosted energy producers’
profit margins and consumer price inflation,
the primary underlying cause is global
energy market conditions rather than higher
markups in the energy sector independently
driving prices.
Comment
This is a curious phase for central bankers. They have failed in their central task which is to control inflation and find themselves now running around worrying about wages and in some ways most worrying of all house prices. Having spent more than a decade pumping house prices up I would welcome some genuine second thoughts but they just seem lost. After all back in November 2021 they were boasting about the house price rises.
Interest rates on outstanding business and housing loans are at record lows, which is positive for the cash flows of businesses and households overall. Very low interest rates have also supported asset prices, which has strengthened the balance sheets of firms and households.
If we now come back to the present we know that there are banking issues around. There will be Australian banks who bought bonds at the highs although so far no one seems to be involved like the US regional banks in trouble. But the tap of support is now off.
Funding obtained by banks under the Term
Funding Facility (TFF) has started to mature, with
$3 billion having matured in April.