MNI RBA Review - August 2022
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
MNI RBA Review - August 2022
Meeting Date: Tuesday 2 August 2022
Link To Statement: https://www.rba.gov.au/media-releases/2022/mr-22-21.html
Contents
• Page 2: RBA 2 August 2022 Meeting Statement
• Page 3: MNI STATE OF PLAY: Rate Rises Not "Pre-Set" As RBA Hikes 50bps
• Page 4-6: Sell-Side Analyst Views
MNI POV (Point Of View): 50 Delivered, No Pre-Set Path
Ahead
The RBA delivered the widely expected and largely priced 50bp rate hike at the end of its August meeting, with the
formal acknowledgement that it is not on a pre-set path when it comes to the further normalisation of monetary
policy (via introducing the phrase to its guidance paragraph) viewed in a dovish light. Note this is a point that
Governor Lowe has highlighted previously, but the formal inclusion in the statement has been seen as a sign that
the RBA could be willing to slow the pace of tightening/pause hikes to assess delivered hikes relatively soon.
The Bank also introduced language surrounding the narrow path it is on when it comes to returning inflation to the
target range “over time, while keeping the economy on an even keel.” The narrow path phraseology has also been
used in wider RBA speak, with the inclusion in the statement seen as a further step towards embedding optionality.
The “even keel” phrase shows that the Bank may be more willing to sacrifice timeliness in returning inflation to its
target in order to promote steady growth (an idea that you can also see playing out in its updated economic
projections, at least in headline inflation terms).
Household consumption continues to present a major point of uncertainty and the Bank has added the move lower
in consumer confidence as a factor under its consideration. Still, it seems to place some faith in the strength of the
labour market, financial buffers and saving rates, while conceding that inflation and higher interest rates are
pressuring households (largely maintaining the tone seen in the July statement). The evolution here will be key
when it comes to shaping the terminal rate of the current hiking cycle.
Note that the OIS strip has unwound the best part of 10bp of tightening when it comes to the Bank’s September
meeting, with a touch over 30bp of tightening priced in for that gathering (2.14%). Further out, ~10bp of tightening
has also been taken out of RBA December meeting-dated OIS, which now sits at ~3.00%, with pricing surrounding
the terminal cash rate also pulling lower to ~3.20% (foreseen in the February/March ‘23 window). We continue to
lean towards the idea of a 50bp rate hike in September which would get the Bank to just below its baseline
assessment of neutral, but note that the language deployed today introduces dovish risks a little ahead of schedule.
When it comes to updated economic projections, the Bank expects headline CPI to peak in Q422, which it had
previously noted, with 7.75% now pencilled in (prev. ~5.9%), matching the government’s peak inflation forecast.
After that, inflation is expected to tail off to a little above 4% in ’23 (prev. 3.1%), then ~3% in ’24. The Bank also
highlighted the focus it has on anchoring inflation expectations, a point it has stressed on several occasions in
recent weeks. GDP expectations were marked lower, moving to 3.25% in ’22 (prev. 4.2%) before falling back to
1.75% in ’23 (prev. 2.0%) and ’24.
The RBA wouldn’t be drawn on the short-term specific point forecasts when it came to the text of today’s statement
(that will come in Friday’s SoMP) but noted that it expects the “a further decline in unemployment is expected over
the months ahead. Beyond that, some increase in unemployment is expected as economic growth slows. The
Bank's central forecast is for the unemployment rate to be around 4 per cent at the end of 2024.” A reminder that
the RBA has underestimated the strength of the labour market post-pandemic, leaving it behind the curve.
1|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBRBA 2 August 2022 Meeting Statement
At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 1.85 per cent. It also
increased the interest rate on Exchange Settlement balances by 50 basis points to 1.75 per cent.
The Board places a high priority on the return of inflation to the 2–3 per cent range over time, while keeping the
economy on an even keel. The path to achieve this balance is a narrow one and clouded in uncertainty, not least
because of global developments. The outlook for global economic growth has been downgraded due to pressures
on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia's invasion of
Ukraine and the COVID containment measures in China.
Inflation in Australia is the highest it has been since the early 1990s. In headline terms, inflation was 6.1 per cent
over the year to the June quarter; in underlying terms it was 4.9 per cent. Global factors explain much of the
increase in inflation, but domestic factors are also playing a role. There are widespread upward pressures on prices
from strong demand, a tight labour market and capacity constraints in some sectors of the economy. The floods
this year are also affecting some prices.
Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range. The expected
moderation in inflation reflects the ongoing resolution of global supply-side problems, the stabilisation of commodity
prices and the impact of rising interest rates. 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 be around 7¾ per cent over
2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.
The Australian economy is expected to continue to grow strongly this year, with the pace of growth then slowing.
Employment is growing strongly, consumer spending has been resilient and an upswing in business investment is
underway. National income is also being boosted by a rise in the terms of trade, which are at a record high. The
Bank's central forecast is for GDP growth of 3¼ per cent over 2022 and 1¾ per cent in each of the following two
years.
The labour market remains tighter than it has been for many years. The unemployment rate declined further in
June to 3.5 per cent, the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels and
a further decline in unemployment is expected over the months ahead. Beyond that, some increase in
unemployment is expected as economic growth slows. The Bank's central forecast is for the unemployment rate to
be around 4 per cent at the end of 2024. Our liaison program and business surveys continue to point to a lift in
wages growth from the low rates of recent years as firms compete for staff in the tight labour market.
A key source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher
interest rates are putting pressure on household budgets. Consumer confidence has also fallen and housing prices
are declining in some markets after the large increases in recent years. Working in the other direction, people are
finding jobs and obtaining more hours of work. Many households have also built up large financial buffers and the
saving rate remains higher than it was before the pandemic. The Board will be paying close attention to how these
various factors balance out as it assesses the appropriate setting of monetary policy.
Today's increase in interest rates is a further step in the normalisation of monetary conditions in Australia. The
increase in interest rates over recent months has been required to bring inflation back to target and to create a
more sustainable balance of demand and supply in the Australian economy. The Board expects to take further
steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The
size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of
the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that
inflation in Australia returns to target over time.
2|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBMNI STATE OF PLAY: Rate Rises Not "Pre-Set"
As RBA Hikes 50bps
By Lachlan Colquhoun
SYDNEY (MNI) - The Reserve Bank of Australia says that it is “not on a pre-set path” of interest rate rises and sees
inflation returning to target in 2024 after peaking at 7.75% this year.
The new language around the pace of monetary tightening came as the central bank, as forecast, hiked official
interest rates by 50 basis points to 1.85%, the fourth consecutive increase since May, (See: MNI
BRIEF: RBA Hikes 50bps, Sees Inflation At 7.75%).
While saying it remains committed to “doing what is necessary” to return inflation to the 2% to 3% target range
“over time,” the Tuesday RBA statement continued the bank’s approach of abandoning forward guidance and being
guided by data and its assessment of the outlook for inflation and the labour market.
Second quarter CPI inflation printed at a two decade high of 6.1% while trimmed mean inflation, the RBA’s
preferred measure, is at 4.9%, (See: MNI STATE OF PLAY: Lower Inflation Print Could Limit RBA Hike).
Unemployment is at a 50 year low of 3.5% but wage increases are lagging inflation.
PEAK THIS YEAR
The RBA continues to believe that inflation will reach its peak this year before subsiding as supply chain issues are
resolved and interest rate rises have an impact on consumer spending.
While some of the supply chain issues are global, others are local and have been caused by widespread flooding
on the Australian east coast earlier in the year.
“Medium term inflation expectations remain well anchored, and it is important that this remains the case,”
the RBA statement said.
Also today, the RBA downgraded its growth forecast to 3.25% this year, and to 1.75% for 2023 and 2024. In the
May Statement on Monetary Policy (SoMP), the RBA forecast 2022 growth at 4.5%.
More on the RBA’s outlook and forecasts will be known on Friday, when the bank publsihes an updated SoMP.
3|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBSell-Side Analyst Views
ANZ: The RBA tightened by 50bp at its August meeting. The key change from July is that there is no longer any
reference to the withdrawal of “extraordinary monetary support.” Rather the statement describes the move as a
“further step in the normalisation of monetary conditions in Australia.” This could be a signal that the RBA Board
may be thinking about reducing the size of the monthly increases to 25bp in September. We think a 50bp increase
is still the most likely choice. The cash rate is still some way below the lower bound of the RBA’s estimate of
neutral, and the statement specifically states that “the Board expects to take further steps in the process of
normalising monetary conditions over the months ahead” even if “it is not on a pre-set path.”
• What’s more, the RBA has revised up its inflation forecast materially.
• The statement does highlight the Board’s preference to return to the inflation target “while keeping the
economy on an even keel.” Inflation remaining well above target until 2024 is in part a reflection of that
preference, even though growth is now forecast to slow below 2% in both 2023 and 2024.
• It will be interesting to see what interest rate setting the RBA’s forecasts assume will achieve that inflation
and growth outcome.
• There are widespread upward pressures on prices from strong demand, a tight labour market and capacity
constraints in some sectors of the economy. The floods this year are also affecting some prices.
Barclays: We think the RBA is now done with large 50bp hikes and is likely to shift to 25bp increments going
forward. We expect the bank to hike the OCR by 25bp in September, and see one 25bp hike each in Q4 and Q1
23, taking the terminal rate to 2.60% in this cycle. We acknowledge a risk that the board decides to front-load its
policy hikes before the window narrows and delivers another 50bp hike in September - still ending the cycle at
2.60% - but that is not our base case.
CBA: The RBA Board today increased the cash rate target by 50bp to 1.85%, as was widely expected. The RBA
now expects inflation to peak at 7¾% by late 2022, and be a little above 4% in 2023 and around 3% in 2024. Some
new elements of the Governor’s Statement give the impression that the Board is getting closer to the point at which
the RBA will pause in their tightening cycle. Our base case is unchanged. We see the cash rate target peak at
2.60% by the end of 2022 (a level which we consider to be contractionary). Financial conditions will continue to
tighten over 2023 with no change in the cash rate given the big fixed rate home loan expiry schedule and we have
50bp of rate cuts in our profile for the cash rate for H22023.
Goldman Sachs: Overall, following a third consecutive 50bp rate hike, today’s statement suggests the RBA will
keep lifting rates - but that it wants to keep its options open on the pace of normalization as policy settings get
closer to ‘neutral’ and the global/domestic growth outlook softens. Looking ahead, we expect the RBA to hike to a
terminal rate of 3.35% to contain the upside risks to inflation - but we have lowered slightly the subjective
probability of 50bp hikes in each of September (60%) and October (55%) alongside the incrementally cautious tone
of today’s statement.
J.P.Morgan: The 50bp move was again described as “a further step”, this time, “in the normalization of monetary
conditions”, whereas last time it was in the “withdrawal of the extraordinary support”. Both statements imply some
support put in place during the pandemic remains, and, given the cash rate is well above pre-pandemic levels, we
have read this as referring to liquidity injection. That component of easing will remain for years, but on the level of
rates, this month’s language is clearly less strident than last month’s.
• For some time the board has been saying in its decision statements and minutes that it will respond to the
data. Governor Lowe’s speeches similarly have argued the bank is not “on a preset path”. That has felt
somewhat glib as the leadership also argued strongly that rates have been sub-neutral, and their clear
inclination is to return to neutral quickly. In that sense, the data has likely been a second-order
consideration in the initial leg of the tightening. As progress is made though, the shift from “withdrawal of
extraordinary support” to “normalization” is a natural and important one. Last month’s statement similarly
removed reference to “the still very low level of interest rates” and the addition of Lowe’s mantra (“not on a
4|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBpreset path”) into the concluding paragraph of the statement adds a further sense that conditionality is
creeping in. This appears consistent with our call which assumes a tapering to 25bp increments, with some
pauses in 4Q as policy approaches the RBA’s assessment of neutral. We expect the cash rate to end the
year at 2.6%, allowing an extended pause in 2023.
• The commentary on the economy was broadly positive, again emphasizing high inflation, the resilience of
the household sector to that shock (and the early stages of higher rates), terms of trade tailwinds, and a
tight labour market. While acknowledging behavioural uncertainties in household spending, they remain
just that so far - behavioural, not driven by income/saving arithmetic - so consumption outcomes are the
space to watch. The statement notes “the board will be paying close attention” to the household spending
data. This is somewhat unusual, as most of the time the labour market and inflation path are the drivers of
greatest uncertainty.
NAB: The RBA’s big-picture strategy should be to set monetary policy to return inflation to the 2-3% inflation target
over time, while also seeking to retain as much of the significant gains in unemployment achieved over the past two
years as possible. NAB’s view is that seeking a return to 2-3% inflation will likely require at least a slightly restrictive
monetary policy setting, which we suggest is in the 2.6-2.85% cash rate range.
• The speed of the rate rises in recent months reflects the need to rapidly recalibrate policy from emergency
levels near zero to somewhat restrictive levels over a reasonably short period. The speed of the moves
should help contain medium-term inflationary expectations, which the Bank continues to assess as well
anchored.
• NAB expects a further 50bps increase in the cash rate in September. With the cash rate then at 2.35% and
approaching more neutral levels, we expect the Bank to step down to 25bps increases in October and
November, to achieve a mildly restrictive 2.85% cash rate in early November. A pause for some time is
likely as the RBA assess the impact of recent moves.
• It’s worth noting that a 4% inflation forecast over 2023, likely precludes much if any easing by the RBA next
year.
• NAB remains comfortable with its 2.85% cash rate forecast for end 2022 but continues to see a step down
in the size of rate increases after this next meeting and a likely pause before the year end. The “not on a
pre-set” path is likely to see significant debate about whether the Bank might even step down the pace of
rate increases at the September Board meeting, while continuing to tighten.
RBC: Amid the global shift lower in terminal pricing and the Fed hinting at slowing the pace of rate hikes after
“another unusually large increase” recently (+75bp), today’s RBA statement contained subtle references to a
similar shift at some point. This gave the short statement a modestly dovish hue with the domestic debate in the
coming weeks likely to be over the merits of a 25bp or 50bp move at the September meeting.
• In this regard, today’s statement contained two notable developments. Firstly, the second paragraph is new
and notes the challenge in striking the right balance between returning inflation to target “while keeping the
economy on an even keel” as the RBA normalizes policy. Like its global counterparts the inflation target
appears to be the only objective at present with growth/employment taking a backseat. Today’s statement
was a deliberate attempt to temper this perception, especially as rates continue to move higher. The
language around this “narrow path” in trying to find the optimal pace of tightening and terminal is not new
and has emerged in recent speeches/Q&A from the Governor but is new in a post-board meeting
statement giving it a little more emphasis. Secondly, the key final paragraph repeats that “further steps” in
normalizing monetary policy are likely in the coming months but adds that the Board “is not on a pre-set
path.” Again, while the Governor’s recent communication has included this set of words, it has not emerged
in a post-board meeting statement.
• To our mind, these two developments likely lay the groundwork for a shift back to more “standard” 25bp
hikes at some point. They keep the door open for either 25bp or 50bp in September depending on global
and domestic developments. With RBA cash still well below neutral and inflation set to lift further through to
year end, the prudent approach remains to get to neutral sooner rather than later with another 50bp in
September before dropping back to 25bp moves in Oct and Nov to see terminal cash at 2.85%. This has
5|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBbeen our base case for some time, but it is likely that the 25bp or 50bp debate dominates in the run-up to
the Sept board meeting with the market alert to any RBA hints in upcoming communication.
• Indeed, the RBA’s notable upward revision to its expectation for peak inflation, now seen at 7¾% (prev.
5.9%) by end-22, would also support a faster move to neutral. It does not expect inflation to be back within
its 2-3% target until well into 2024 and this will keep the risk to inflation expectations firmly to the upside.
We will get a full update of its macro forecasts, extended out to end-24, in Friday’s SoMP but there will be
few surprises with snippets in today’s statement suggesting similar revisions to Treasurer Chalmers’
Economic Statement last week.
TD Securities: We read it as dovish as did the market. Despite the fact that inflation is now expected to stay
elevated at 4% by Q4' 2023, above the Bank's 2-3% target inflation band, markets focused on the addition of the
Bank's guidance that the policy normalisation ahead "is not on a pre-set path". We highlight that the RBA Governor
verbally made this comment back in June, but it's the first time this has made its way into the Statement.
• If the Bank really wanted to get on top of inflation and return it back into the 2-3% target band next year, it
could raise rates aggressively. However the fact that it expects inflation to remain well above its target
band in 2023 at 4% implies the Bank is in no pressing rush to normalise monetary conditions rapidly. In
other words, rapid 50bps hikes are becoming less likely, as hiking aggressively could adversely impact
growth.
• With inflation expected to be well above the RBA's target band in 2023, we would argue the RBA does not
have the luxury to pause. We stick with our current forecast for the RBA to hike 50bps next month taking
the cash rate to 2.35% (near neutral at 2.50%) and then for the RBA to switch to 25bp hikes over Oct, Nov
and Dec. We expect a final 25bps hike to 3.35% in Feb '23.
• The risk to our view is for the RBA to hike 25bps in Sep, not 50bps as we expect. We are not changing this
view for now. But clearly today's statement is an attempt by the Bank to give itself the flexibility from being
locked into 50bps hikes over successive meetings this year. Today's statement provides the strongest
suggestion of a shift in that direction compared with prior statements.
Westpac: The 50 basis point move today was widely expected, although some analysts had been flirting with 75
basis points. The most important aspect of the Statement was whether there was any indication that the Board
might ease back to a 25 basis point pace in September. But there does not appear to be any evidence to suggest
such a policy and we confirm our view that there will be another lift of 50 basis points in September. However, there
were references that might imply a more cautious approach after September and we see them as consistent with
our view. As indicated in the final sentence” the Board confirms its commitment to doing what is necessary to
ensure inflation in Australia returns to target over time.” We expect that objective will require a series of four 25
basis point moves following the 50 basis points in September.
6|Page
Business Address - MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBYou can also read
