MNI: Housing, Services Inflation Concerning - RBA Minutes

The strength of the Australian housing market continues to imply less drag on the consumer than the Reserve Bank of Australia had expected, while mortgage approvals suggest financial conditions may not be as tight as previously judged, according to the published minutes of the June 6 meeting.

The increase in the housing market, likely driven by strong population growth and expectations that the interest-rate cycle was near its peak, was noted across all major cities in May.

MNI reported recently that the strength of the Australian housing market had unexpectedly reduced the drag on household consumption factored into RBA models, catching the Reserve off-guard and potentially raising the chance rates could move higher if strong house-price growth persists (see: MNI POLICY: House Price Strength Thwarts RBA Models). The total value of residential dwellings in Australia rose by AUD140.0 billion to AUD9.9 trillion over the March quarter, snapping the downward trend in prices recorded since the RBA began hiking rates in May 2022, according to the Australian Bureau of Statistics (see: MNI BRIEF: Aussie Housing Market Strengthens Over Mar Quarter).

INFLATION RISKS

The board noted inflation risks have shifted to the upside and core inflation remains sticky, with services the primary source of pressure. The RBA aimed to lower inflation while retaining low levels of unemployment, however, a more prolonged period of above-target inflation would increase the risk that firms’ and households’ expectations for inflation rise.

“If this occurred, high inflation would become more persistent with the result that interest rates would need to be higher for longer,” the Board added. “This would increase the risk of a sharp rise in unemployment.”

The RBA raised the cash rate 25bp to 4.1% earlier in the month, its highest level in 11 years, doubling down on May’s hawkish message to drag down inflation to its 2-3% target within a “reasonable timeframe.”

Members noted various other considerations created upside risk for inflation, such as retail electricity prices and rent, while there had not been a clear moderation in goods price inflation. “In considering the outlook for inflation, members discussed the importance of productivity growth, noting that output per hour worked had not increased over the preceding three years,” the board noted.

LABOUR & WAGES

The labour market remained tight, however, conditions had eased slightly alongside slower growth in economic activity, the Board noted. “Employment growth over the prior six months had been a little less than growth in the working-age population over that period. While the unemployment rate had ticked up to 3.7% in April, the number of people employed had not changed much."

Wages growth had also recorded in the 3.5-4% range. “The average size of wage changes in the private sector for those who received an increase had remained at around 4% for the third consecutive quarter. In the public sector, wages growth had picked up to 3% and a further increase was expected.”

Australian Commonwealth Government Bonds were 3-5bp richer after the release of the minutes, but were weaker on the day (YM +1.0 & XM -4.0). The 3/10 cash curve was 2bp steeper following the release (see: Richer After The RBA Minutes). The RBA next meets on July 4.