In her first meeting as RBA governor, Michelle Bullock and the Board announced a rate hold. It was a decision widely anticipated by the market and it marks the third consecutive month the RBA has held rates on 4.1% – but don’t get too comfortable. While our global peers are starting to flag an end to tightening, the consensus expects we’ll see another hike of 25bps in November. This will see the Australian cash rate jump to 4.35% and with any luck, this will be the terminal rate for the foreseeable future.
In the statement this afternoon, the RBA cited concerns around inflation data, unemployment and wages growth, along with uncertainty for the Chinese economy. That said, they are seeing some signs that rates are finally having an effect on consumers.
Here's what you need to know about today’s decision.
Headline inflation essentially refers to the cost of food and energy – you might also hear it refer to as cost of living and it’s measured by the consumer price index (CPI). The RBA Board has been clear that they are trying to manage headline inflation and keep it in a target range of 2-3%. Inflation has reached as high as 8.4% and appeared to fall to 4.9% in the 12 months to July, reassuring the RBA that their measures might be starting to work.
Then came August… Inflation rose 5.2% for the 12 months ending August. This suggests that the RBA may need to act with another hike in November. We will know for sure if there is another hike come the September quarterly inflation print on October 25.
In its statement today, the RBA reiterated its expectation for inflation to return to the target range in late 2025.
Another measure that the RBA watches is unemployment data and wages growth – they want to see low unemployment and controlled wages growth. The unemployment rate remained at 3.7% in August - which is near 50-year lows.
There was a record high participation rate of 67% which largely links to increases in part-time employment but it’s worth noting that the monthly hours rate decreased and underemployment rate increased.
From the RBA’s perspective, this means rate hikes are slowly starting to hit. The last print for wages growth was for the June quarter and released in August. While wages growth increased 0.8%, this was less than expected.
According to Roy Morgan data, 30.2% of mortgage holders are now at risk of mortgage stress – we still haven’t seen the market hit with stress sales, in fact, supply remains constrained. Alongside that strong immigration continues to support growth in housing prices. PropTrack’s Home Price Index report on Sunday noted that national prices had climbed 0.38% in September and 4.31% for the year.
The RBA is concerned about housing because, while it only represents around 5% of GDP, it is heavily linked to other parts of the economy such as employment, consumer spending and bank finances.
The RBA statement specifically highlights ongoing uncertainty in the Chinese economy, particularly in the property market. Australia has significant economic ties to the Chinese economy, with the bulk of our exports heading there and commodities top of the list. The crisis in the property sector is a challenge for iron ore imports in particular – some of the big developers in crisis like Country Garden also operate in Australia which could spell trouble for our construction sector and the labour force. You can read more about this here.
There was one item noticeably missing from today's RBA decision - although it may pop up in the meeting minutes in two weeks. The moves in the Australian bond market have been breathtaking, following the lead of our global peers. The Australian 30-year government bond yield is up by more than 45 basis points in the last month alone. From the 2023 low, the yield is up more than 120 basis points. And it does not matter which part of the curve you look at, the moves remain outsized.
Why does this matter?
Because a massive move in the bond market has ripple effects for all other asset valuations. And as Hans Lee wrote last week, the sell-off has been happening for most of this year but is only starting to impact equities now. If it's only impacting equities now, then there's a good chance there is more downside to come for risk assets. While the RBA does not openly acknowledge they look at asset prices, financial markets are a source of creating and increasing wealth - and they must take market moves into consideration. You can read more here.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks," the RBA said in a statement.
It is a fairly hawkish statement from the RBA. That is, there’s a fair chance we’ll see another rate hike in November (or even December) this year.
There’s a few things to note for investments
Equity markets tend to be volatile in the wake of a rate increase – but bear in mind, it’s already a tougher environment for many sectors. Retail is under pressure from falls in consumer spending – will a rate hike be enough to dampen spending going into Christmas? Time will tell…
Bond yields will increase off the back of a rate rise - though this is a concern in itself. A 'golden rule of monetary policy' noted by True Insights' Jeroen Blokland suggests that when real US yields are greater than 2%, it's an indicator that economic activity is severely impacted and the odds of a recession increase accordingly. All the major bonds' real yields stateside are above this 2% figure. (In Australia, the real yield is sitting currently at 4.13% for the 2-year bond and the 30-year is nearly 5%.)
Investors should monitor activity in China as it will be significant for a range of Australian sectors, such as Materials and Construction services.
In theory, another rate increase should dampen property prices – though supply and demand challenges suggest any weakness is likely to be temporary. While there is a substantial number of mortgages at risk, it’s no guarantee we’ll see a flood to market – it’s not in the banks’ interests to foreclose but rather, data suggests that if they assist people who have missed payments, they tend to catch up on their debt later.
This article was originally published for Livewire Markets on Tuesday, 3 October 2023.
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