Written by Michal Park – Senior Financial Adviser
There is no doubt that the Australian economy is on its way to expansion following a pronounced contraction amid Delta Covid restrictions. This anticipated expansion is largely due to vaccination coverage and expansionary policy setting. However, we are not out of the woods yet which is why the Reserve Bank of Australia maintained the cash rate at 0.10% for the month of November.
Key information from the latest meeting minutes include:
- The global outlook is expected to return to pre pandemic levels in 2022
- Yes inflation has increased (sometimes above central banks targets in a number of economies) but it’s expected that the factors leading to this boost in inflation are temporary and inflation is likely to moderate in 2022
- Inflation has increased in Australia predominantly due to fuel prices and home building costs. It is expected to be 2.25% by the end of 2022 and 2.50% by the end of 2023.
- A consistent pattern in wages growth across advanced economies was not evident. This is particularly the case in Australia, despite a strong labour market recovery (though this is expected to improve by the end of 2023)
- The unemployment rate in Australia was forecast to be just under 5% by the end of 2021, 4.25% by the end of 2022 and 4% by the end of 2023.
- In early October, APRA increased the serviceability assessment rate that it expects banks to use to assess prospect borrowers’ loan applications.
The two alternative scenarios facing the Australia economy are:
- A stronger economic trajectory was possible if households increased spending more than expected.
- A weaker trajectory was possible if uncertainty prevails – such as the emergence of a new strain of Covid 19 – which would lead to stronger household saving, reduced confidence and lower consumption.
The RBA have been vocal about wanting to maintain the cash rate at its current level until 2024, but have noted that future decisions about the cash rate would be based on the state of the economy and not particular dates on the calendar. Whether the banks increase the cash rate prior to 2024 will largely be based on the above two scenarios.
A stronger economic trajectory needs:
- Inflation to be between 2 and 3% on a sustainable basis
- The labour market to be tight enough to generate materially higher wages growth
- A return to full employment in Australia
For mine, I believe that the RBA will maintain cash rates as per their original plan (increasing them closer to 2024) rather than move earlier and risk any disruption to consistent economic growth.