Governor Lowe Highlights Consumption & Services Inflation As Key Watch Points

RBA Governor Lowe is appearing before the House Economics Committee today, in what will be his final appearance as Governor before the Parliament. His opening remarks can be viewed here.

• The Governor outlined the recent forecasts, presented in the latest SoMP last Friday. The Governor stated that some further tightening may be required, in line with recent monetary policy statements.
• There were two risks highlighted by the Governor that help determine the policy path. -"The first is the outlook for household consumption, given the large number of factors influencing household finances and spending at the moment." "...it is a complicated picture and there are scenarios in which consumption is weaker than our central case and others in which it is stronger, with implications for the trajectory of inflation. We are watching developments here very carefully."
• The second is services inflation: "The high services price inflation reflects a combination of factors, including strong demand for services in the wake of the pandemic, stronger growth in nominal wages and incomes, and weak productivity growth. This weak productivity growth is a particular problem for many reasons." "The RBA’s forecasts have been prepared on the basis that growth in productivity picks up to be close to the rate in the years before the pandemic, which would contribute to a moderation in growth in unit labour costs and thus inflation. If this pick-up in productivity does not occur, all else constant, high inflation is likely to persist, which would be problematic."
• " The Board is seeking to establish a credible path back to the inflation target over the next couple of years to avoid a damaging shift in inflation expectations. It is also seeking to strike the right balance between getting inflation down in a timely way and preserving as many of the gains in the labour market as possible."
• So, the RBA is still largely in watch and wait mode, particularly in terms of these two factors outlined above. Note we get Q2 wages data next Tuesday.
• AUD/USD has not shifted a great deal in early trade today. Last around the 0.6510/15 level, down a touch from NY closing levels. OIS is also quite steady (-1bps versus pre-testimony).