Tuesday, May 3, 2022

Australia's RBA increases rates 0.25% - first time in 12 years

Today the RBA has increased the cash rate for Australia by 0.25% which is the first time in twelve years that the rates have increased. Here is their official statement - 

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points.

The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.

The outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from: the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation. The central forecast is for Australian GDP to grow by 4¼ per cent over 2022 and 2 per cent over 2023. Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed. Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.

Inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies. Over the year to the March quarter, headline inflation was 5.1 per cent and in underlying terms inflation was 3.7 per cent. This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices. A further rise in inflation is expected in the near term, but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2 to 3 per cent. The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4¾ per cent; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3 per cent. These forecasts are based on an assumption of further increases in interest rates.

The Bank's business liaison suggests that wages growth has been picking up. In a tight labour market, an increasing number of firms are paying higher wages to attract and retain staff, especially in an environment where the cost of living is rising. While aggregate wages growth was subdued during 2021 and no higher than it was prior to the pandemic, the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms.

Given both the progress towards full employment and the evidence on prices and wages, some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate. Consistent with this, the Board does not plan to reinvest the proceeds of maturing government bonds and expects the Bank's balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end. The Board is not currently planning to sell the government bonds that the Bank purchased during the pandemic.

The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.

A media and markets briefing, including a question and answer session, will be held at 4pm AEST today with the audio broadcast live on www.rba.gov.au.

Tuesday, December 7, 2021

Rates Remain Steady While AUD falls

 Today the RBA made the decision to keep the cash rate at 0.1% despite the falling AUD. Here is the statement from the RBA about their decision - 

At its meeting today, the Board decided to:

  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent
  • continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022.

The Australian economy is recovering from the setback caused by the Delta outbreak. High rates of vaccination and substantial policy support are underpinning this recovery. Household consumption is rebounding strongly and the outlook for business investment has improved. The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery. The economy is expected to return to its pre-Delta path in the first half of 2022.

Leading indicators point to a strong recovery in the labour market. Job advertisements are at an historically high level and there are reports of firms finding it difficult to hire workers. Wages growth has picked up but, at the aggregate level, has only returned to the relatively low rates prevailing before the pandemic. A further pick-up in wages growth is expected as the labour market tightens. This pick-up is expected to be only gradual, although there is uncertainty about the behaviour of wages as the unemployment rate declines to historically low levels.

Inflation has increased, but, in underlying terms, is still low, at 2.1 per cent. The headline CPI inflation rate is 3 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains. A further, but only gradual, pick-up in underlying inflation is expected. The central forecast is for underlying inflation to reach 2½ per cent over 2023.

Housing prices have risen strongly over the past year, although the rate of increase has eased over recent months. Housing credit increased by 6.7 per cent over the past year, but, more recently, the value of housing loan commitments has declined from high levels. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.

Globally, bond yields have declined over the past month due to concerns about the Omicron variant. The Australian dollar exchange rate has depreciated and is around its lows of the past year. Financial conditions in Australia remain highly accommodative, with most lending rates around record lows.

At its February meeting, the Board will consider the bond purchase program. By mid February, the RBA will hold a total of $350 billion of bonds issued by the Australian Government and the states and territories, with these holdings providing significant support to the economy. In reaching its decision in February, the Board will be guided by the same three considerations that it has used from the outset of the program: the actions of other central banks; how the Australian bond market is functioning; and, most importantly, the actual and expected progress towards the goals of full employment and inflation consistent with the target.

The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient.

Friday, October 1, 2021

CoreLogic: 18% increase in Perth house prices in 12 months

Perth houses have increased 18% in the past year according to the recent report from CoreLogic. The median value of a Perth house is now $524,589. This follows the nationwide trend up with Sydney house prices increasing by 23.6% and Melbourne increasing by 15%. You can read more here.

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