The Reserve Bank governor devoted much of his post-meeting statement yesterday to giving bond and foreign exchange markets a solid boot up the backside, making sure they understood there would be no rate rises next year, and there was no basis for any more surges in bond yields or the value of the Aussie dollar.
But deep in the statement was a significant change in the bank’s view on how long it will take to find wage growth sufficient to drag inflation higher and get monetary policy back to something resembling normality.
After the ruction in bond markets last week fuelled — notionally — by inflation fears, and the RBA’s pushback on Friday and Monday with additional purchases of three- and 10-year bonds, the post-meeting March statement was an opportunity for Philip Lowe to once again explain to screen jockeys in Australia and offshore how the bank saw both the inflation “threat” and the bank’s monetary policy goals.
And Lowe took it, using the central bank equivalent of words of one syllable or fewer for the dummies in the markets: “Wage and price pressures are subdued and are expected to remain so for some years.”
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“Are expected to remain so for some time” is a significant addition compared with his February meeting statement — it indicates that the RBA no longer sees wages rising strongly any time soon.
Despite the strengthening recovery, Lowe pointed out the economy “is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years. Further progress in reducing spare capacity is expected, but it will be some time before the labour market is tight enough to generate wage increases that are consistent with achieving the inflation target”.
In the central scenario, the unemployment rate will still be around 6% at the end of this year and 5.5% at the end of 2022. In underlying terms, inflation is expected to be 1.25% over 2021 and 1.5% over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions.”
That is: don’t be fooled by transitory factors — we’re still stuck in a low inflation economy that desperately needs a tight labour market to push wages growth up, in turn driving inflation up to the kind of levels the RBA would see as necessitating a tighter monetary policy.
And just to make sure the screen jockeys — and the silly headline writers at Nine newspapers — got the message, Lowe repeated: “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest.”
To back the point up, Lowe said that — putting aside the expected blip this year — inflation is forecast (on the RBA’s underlying basis) at 1.25% this year and 1.5% next year. That’s despite what’s expected to be a surge in quarterly GDP growth between now and June that will lift annual growth to 8% before heading back to 3% beyond 2021.
That’s because the bank knows that later this year — as the withdrawal of fiscal stimulus proceeds — the post-lockdown in household spending will run out of juice and house price growth will slow and then fade as the impact of no migration hits demand, especially in apartments (non-house dwelling approvals slumped 40% in January).
Unlike bond market heroes, the RBA has to deal with the real world of households and businesses, not inflationary fantasies.