RBA March Board Meeting: Nothing to See Here

The RBA meets today with no real prospect of any policy change.

Recent communication suggests that the RBA would be ‘patient’ in withdrawing any policy stimulus. If anything, recent wage developments and the uncertainties wrought by the Russia / Ukraine conflict would only reinforce the RBA’s ‘patient’ disposition. Such themes are likely to be enunciated in the Governor’s Statement that accompanies the announcement of an unchanged stance.

However, policy challenges remain.

On the surface, wage growth, as measured by the Wage Price Index (WPI), remains largely contained. However, there are some indications that suggest labour market pressures were intensifying as 2021 came to an end. For example, the private sector WPI that includes bonuses showed annual growth of 3.0% - the highest rate of annual increase in eight years.

Curiously, in my view, the RBA focuses on the ex-bonus measure of the WPI. Measures that include bonuses are likely to be more obviously pro-cyclical and more indicative of inflation currents than measures that exclude them. Measures that exclude bonus or incentive payments are likely to be more subject to the “wage inertia” features (both upwards and downwards) that the RBA Governor has previously referenced.?Nevertheless, and despite the unemployment rate at levels not seen since the mid-1970s, it is difficult to argue that wage growth is sufficient to warrant the RBA changing course.?

The Russia / Ukraine conflict is clearly a risk to global economic growth and despite some unhelpful inflation consequences via surging commodity prices, particularly in the energy complex, the conflict might argue for a tactical delay in the withdrawal of policy stimulus. In some sense, Australia is better equipped than other developed countries to withstand the potential fallout from the conflict.

Higher commodity prices are probably a net benefit for the Australian economy. Further, being a middle-ranked power some distance from the conflict reduces negative economic ripples. A relatively benign starting point for inflation is also helpful.???

What this means is that in a tactical sense, recent developments may mean that the peak policy rate in 2022 may well fall short of market pricing. Currently, markets are anticipating an increase in the policy rate to around 1.20% in 2022 from its current level of around 0.10%. That might be a challenge.

However, to eschew the prospect of withdrawing stimulus altogether at some stage in 2022 is also a path to be avoided, particularly given recent RBA efforts to focus on ‘outcomes guidance’ rather than ‘calendar guidance’. In other words, the RBA will admit in public commentary the ‘plausibility’ of a policy rate increase (or increases) in 2022, but only if its current inflation / wage forecasts are exceeded.

My own view is that the RBA forecasts are located on the downside end of the inflation risk continuum and, as such, a policy rate rise around mid-year is still tenable. A clear acceleration in the March quarter WPI released on 18 May would further enhance that prospect, particularly if it follows another upward surprise in the CPI to be released on 27 April. Both of those outcomes are, in my view, within the realm of the probable and an increase in the policy rate in June is therefore in the realm of the possible.??

In a strategic sense, the likely inflationary (‘stagflationary’?) consequences that accompany the Russia / Ukraine conflict might mean that any tactical delay in stimulus withdrawal, might mean the ultimate terminal policy rate will be higher as the global inflation genie gets out of the bottle and central banks struggle to get it back in in 2023 and beyond.?

?Stephen Miller is an Investment Strategist with?GSFM. The views expressed are his own and do not consider the circumstances of any investor.