Goldman: RBA hunting house prices

Goldman with the note. Makes sense to me. Leading indicators were already turning up with house prices.

RBA Governor Lowe spoke this evening following today’s surprise decision to increase the cash rate by 25bp to 3.85%. Against the backdrop of that decision, the Governor observed still “very tight” labour market conditions, elevated services & energy price inflation, recent increases in house prices and weaker AUD.

The RBA retains a tightening bias, noting that “further tightening of monetary policy may be required”. Since last November we have been forecasting the RBA to lift the cash rate to 4.1%.

We continue to expect the RBA to hike rates to 4.1%, with a final +25bp rate hike in July following updates on the national accounts, unit labour costs, and the annual minimum wage decision. We view the balance of risks as skewed to a higher terminal rate over time, but the RBA’s reaction function is somewhat unclear and the timing of future interest rate moves is uncertain.

Main Points:

• In his prepared remarks, Governor Lowe outlined the key rationale for the surprise rate hike at today’s meeting. He noted that since pausing the hiking cycle in April, the RBA has observed 1) ‘further evidence’ that Australia’s labour market is ‘still very tight’, 2) services inflation is ‘uncomfortably persistent abroad’, and 3) asset prices including the exchange rate and house prices are ‘responding to changes in the interest rate outlook’ – which we note was a consideration that was omitted in today’s post-meeting statement.
• Governor Lowe noted that while 1Q2023 CPI confirmed that inflation has peaked and goods price inflation has slowed, “services and energy price inflation is still high and likely to remain so for some time”. Governor Lowe also noted the “worryingly persistent services price inflation” overseas.
• In terms of the timing of rate hikes, Governor Lowe noted that the Board remains committed to return inflation to target “within a reasonable timeframe”, and while the RBA does not “need to get inflation back to target straight away”, “nor can we take too long”.
• Looking ahead, Governor Lowe reiterated today’s forward guidance that “some further tightening of monetary policy may be required” to ensure that inflation returns to target “in a reasonable timeframe”. Governor Lowe noted the RBA will pay close attention to “developments in the global economy, trends in household spending and the outlook for inflation and the labour market”.

Governor Lowe took several questions in the Q&A

• On whether today’s decision to hike was unanimous among the Board, Governor Lowe noted April’s decision to pause was finely balanced and the Board considered the same arguments today but the balance tipped the other way. Dr Lowe noted further evidence of strength in labour market and inflation as the key drivers of the decision, and that the Board reached a strong consensus that it was time to move again.
• On the specific timeframe to bring inflation back to target, Dr Lowe indicated that the RBA expected inflation to get back to top of target range by mid-2025, and that this would be a good outcome alongside a modest increase in the unemployment rate to around 4.5%. Governor Lowe noted that trying to get inflation back to target more quickly would involve more family stress and job losses, which would
  outweigh the benefits of lower inflation.