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The Reserve Bank of Australia is likely to accept continuing high housing rental prices even as it wrestles overall inflation back to its 2-3% target band, presenting it with a tough communication challenge, a former RBA economist told MNI.
Paul Ryan, senior economist at REA Group and a former housing market specialist at the Reserve, noted rental prices will likely grow about 1.43% over the June quarter, slightly below the 1.53% recorded over the March quarter, but remain sticky throughout the year at about 5% annualised. “[Rent] will be a big component of CPI and will keep pushing inflation higher,” Ryan said. “We may get to the point where rent is the dominating factor of that upward trend line.”
The Australian Bureau of Statistics will publish its June quarter CPI figures on Wednesday. Its last quarterly update released in April showed rental prices had recorded the largest annual rise since 2010 (see charts). MNI reported in April the RBA was debating internally how to deal with high rental inflation. (See MNI POLICY: RBA Ponders How To Respond To Rental Inflation)
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Ryan said the Reserve will simply “look past” rental market inflation, as it has done with other segments monetary-policy tools find hard to address, such as the energy market and other tradables.
“The RBA talks about this ‘slower path’ to getting back to target and a part of that is accepting the rental conditions now as we're going to see high rental inflation going forward and there’s not much the RBA can do about it,” he added. “It's a hard communication challenge for the RBA, because rents are enormously salient to people.
He said the Reserve would instead focus on services inflation and unit labour costs, which are more sensitive to interest rate hikes. Slowing income growth will push down the amount people can spend on rent, which will put downward pressure on prices, he argued. “But the outcome by which we have to suppress rental market inflation with lower demand and lower incomes is – form a welfare perspective – a bad one. It would help the RBA if it knew a large amount of housing supply was coming online, unfortunately that's not the case and that kind of change takes a long time."
Ryan believes the RBA board will likely hike by 25bp to 4.35% when it next meets on Aug 1, with a 50% chance of a further hike in September. However, the chance of an August hike will reduce should CPI print lower than expected on Wednesday, he added.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.