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RBA's Michelle Bullock steers steady course amidst economic uncertainty

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2023-10-04

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Steady as Michelle Bullock took the reins as the new Governor at the Reserve Bank, judging by the statement from her first central bank monetary policy meeting on Tuesday. The RBA left the cash rate unchanged at 4.1% for the fourth consecutive month but also maintained the hawkish approach of her predecessor, warning that a further rate hike could be necessary if economic activity exceeded forecasts.

"Some further tightening of monetary policy may be required to ensure that inflation returns to the target within a reasonable timeframe, but that will continue to depend upon the data and evolving risk assessment," the new Governor stated in her inaugural address.

"The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. Given this, and the prevailing uncertainty in the economic outlook, the Board has once again chosen to keep interest rates unchanged this month.

"This will allow more time to assess the impact of the interest rate increases thus far and the overall economic outlook."

Economists had expected another pause in October, despite recent rises in petrol prices sparking fears of renewed price growth, as occurred in August, according to the monthly inflation indicator.

Thus far, data such as retail sales and job vacancies have fallen short of expectations (though employment remains strong, and unemployment stands at a low 3.7%).

Yesterday's data on building approvals and housing finance for August showed modest improvement but still remained significantly lower than a year ago.

The total number of dwellings approved rose 7.0% in August, seasonally adjusted, after a 7.4% drop in July, according to data from the Australian Bureau of Statistics (ABS). This still left total approvals 23% below August 2022 levels.

Approvals for private sector houses rose 5.8%, following three months of little change, while approvals in the more volatile private sector dwellings excluding houses series rose by 9.4%, following a 14.6% slide in July. Private house approvals were down 15.2% in the year to August, and non-house dwelling approvals were off by a substantial 34.1%.

Meanwhile, there was a small 2.5% rise in the number of new owner-occupier loan commitments in August 2023, but that was 12.3% down compared to a year earlier, according to lending finance data from the ABS.

The number of refinanced owner-occupier loan commitments between lenders fell 5.4% in August to 26,539, after reaching an all-time high last month.

The ABS pointed out that since November 2022, the number of refinanced loans has exceeded the number of new owner-occupier loan commitments. Refinancing has remained at unprecedented levels as households continued to seek better loans amid repeated rate hikes by the RBA.

The rate hikes from the RBA have reduced demand for new housing finance, but this has had no impact this year on demand for houses, with prices surging again in September, this time by 0.8%, and 2.2% for the third quarter (down from 3.3% in the June quarter).

Since January, home values have rebounded by 6.6% after falling in 2022, and they are on track to reach a new record high by late November, according to data from CoreLogic.

This continued strength didn't receive a mention in Ms. Bullock's statement on Tuesday.

"Inflation in Australia has passed its peak but remains elevated and is expected to stay that way for some time. Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services continue to rise briskly, and fuel prices have risen noticeably in recent times.

"Rent inflation also remains elevated. The central forecast is for CPI inflation to continue to decline and return to the 2–3 per cent target range in late 2025," she forecasted.

"Growth in the Australian economy was slightly stronger than expected in the first half of the year. However, the economy is still experiencing a period of below-trend growth, and this is expected to persist for some time.

"High inflation is weighing on people's real incomes, and household consumption growth is weak, as is dwelling investment. Nonetheless, conditions in the labor market remain tight, although they have eased somewhat.

"Given the forecast of below-trend economic growth, the unemployment rate is expected to gradually rise to around 4½ per cent late next year. Wages growth has picked up over the past year but remains consistent with the inflation target, provided that productivity growth improves," Ms. Bullock said.

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