Board Waiting To See How Long Monetary Policy Lags Are

RBA Deputy Governor Bullock and Board member Harper participated in a WEAI Monetary Panel. There was not much added to the outlook for monetary policy during the discussion. The RBA is watching and waiting and considering the “long and variable lags” of the tightening it has done to date.

• Bullock said that the RBA would have paused in April even without March’s banking turmoil. During the Q&A, Bullock said that the Board is now waiting to see how long it is going to take for 350bp of tightening to feed through to the economy. Given that around 40% of mortgages were on fixed-term loans, the lags could be longer this cycle. She also noted that 3.6% rates were historically not that high.
• Previous episodes of high inflation have taught us that it is very important not to let inflation expectations get out of control and currently they are in line with the RBA’s target.
• The RBA is monitoring the housing market very closely as there are developments which pose upside and downside risks to inflation. Vacancies are very low and there is strong immigration while future housing starts are not looking good, therefore there are significant upside risks to rents and thus inflation. While, reduced residential construction is likely to weigh on growth. Bullock noted that house prices have stabilised well above pre-pandemic levels.
• RBA model indicates that the AUD is about right for where commodity prices are.
• Australians are still saving.
• Negative rates were discussed during the pandemic by the Board, but given the damaging impact seen in other countries, it was a path the RBA didn’t want to go down.