In a speech delivered earlier today, newly-minted RBA governor Philip Lowe basically told us what he would be watching when it comes to interest rates, at least from a domestic perspective: inflation, both actual and expectations, labour market indicators, particularly measures of underemployment, along with developments in the housing market.
Now, just hours later, we’ve been given an indication on the RBA’s thinking on each at the start of this month, courtesy of the relase of the minutes of the board’s October monetary policy meeting.
Here are the key paragraphs from the release, providing an indication on what the board’s view was on each just two weeks ago, starting with the outlook for inflation.
There was a reasonable prospect of sustaining growth in economic activity that would support further employment growth and, in time, a gradual increase in wage growth and inflation.
Growth in average earnings per hour recorded in the national accounts – a broader measure of earnings than provided by the wage price index – had picked up over the past two quarters, to be 3 per cent over the year to the June quarter. This had provided some evidence that the downward pressure on earnings from the movement of workers in high-paying mining-related jobs to lower-paying jobs in the non-mining economy was waning.
Feeding on from the commentary on wage costs, here’s the board’s discussion relating to the labour market:
Labour market conditions
Indicators of labour market conditions had been mixed. The unemployment rate had declined to 5.6 per cent in August and had fallen by around ½ percentage point over the past year. However, the underemployment rate, which captures workers who would like to work more hours, had increased over the past year. Members noted that it was important to consider the number of additional hours workers wanted to work in order to assess the degree of underutilisation in the labour force more accurately.
Part-time work had accounted for all of the increase in employment since the beginning of the year, with full-time employment having been little changed. Looking ahead, the increase in job vacancies and advertisements was consistent with moderate employment growth in the coming months, although outcomes were expected to vary across states.
And finally, here’s the board’s view on developments in the housing market:
Conditions in the housing market had been mixed over prior months. The effects of tighter lending standards had been apparent in indicators such as the shares of interest-only loans and loans with high loan-to-valuation ratios in new lending, both of which had declined over the past year. Turnover had declined and housing credit growth had been steady at a noticeably lower rate than a year earlier.
Although the rate of increase in housing prices had been lower than a year earlier, growth in housing prices and auction clearance rates had strengthened in Sydney and Melbourne in the months leading up to the meeting. Members noted that considerable supply of apartments was scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.
Overall, members assessed that while the risks associated with rapid growth in housing prices and lending had receded over the past year, developments would need to be monitored closely.
Risks around the projected large increases in supply in some inner-city apartment markets had increased.
Outside of those three key areas for policy deliberations, the RBA touched on recent weakness in household consumption, the largest component with the Australian economy, noting it “was driven by a decline in the consumption of goods, consistent with low growth in retail sales volumes, while growth in the consumption of services had remained around average”.
Board members also noted that “future consumption growth would largely depend on growth in household income”, an important admission given wages makes up the vast majority of income for most households.
On the international front, the board once again singled out concern about accelerating debt levels in China.
“Debt had continued to expand despite slower economic growth, and banks’ non-performing loan ratios had been rising,” the board said. “Members made the general observation that levels of leverage that previously seemed sustainable could pose risks as economic growth slows.”
Nearer-term, the board noted that “growth in China appeared to have stabilised in recent months, supported by fiscal stimulus and accommodative financial conditions”.
Towards the other major international policy consideration right now — the outlook for US interest rates — the board said “most (FOMC) members expected to raise the policy rate in December, noting that “the latest market pricing implied that markets considered a rate increase likely in December”.
Looking ahead to its next monetary policy meeting, scheduled for November 1, the board said that “data on CPI inflation for the September quarter and an update of the forecasts would be available at the next meeting”.
“This would provide an opportunity to consider the economic outlook, assess the effects of previous reductions in the cash rate and review conditions in the labour and housing markets.”
While there is considerable uncertainty over the outlook for the domestic labour and housing markets, based on discussions held in October, neither appear to be sources of anxiety to the board in terms of near-term reduction in interest rates.
Though the CPI release, due next Wednesday, will provide an opportunity to consider the economic outlook, one suspects that only a very weak core inflation figure will be enough to push the board to cut rates to 1.25% at this meeting.
In a note released earlier today, economists at the Commonwealth Bank suggested that a core quarterly inflation of 0.3% or lower would be enough to trigger another rate cut from the RBA in November.