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Australia & New Zealand

Australia & New Zealand Chart Book

Australia & New Zealand Chart Book

RBA to hike rates more sharply than most anticipate

The minutes of the RBA’s July meeting showed that the Bank debated a smaller 25bp rate hike but ended up hiking rates by 50bp. Those minutes also included a discussion of the level of the neutral interest rate, which will come into touching distance before long if the Bank keeps hiking rates aggressively. Nonetheless, we still think there’s a decent chance that the Bank will deliver a hefty 75bp hike at its upcoming meeting in August. For one thing, the unemployment rate has now plunged to 3.5%, a level that the Bank only expected to be reached by the middle of next year. It will probably fall further over coming months. What’s more, the Q2 inflation data, due on 27th July, should show another very strong increase in consumer prices. Either way, we’re increasingly confident in our above-consensus forecast that interest rates will peak at 3.6%. Australia Drop-In (15:00 SGT, 27th July): Join our 20-minute briefing on why we think Australian inflation is heading higher than the consensus expects, how the RBA will have to raise rates by more than most appreciate to tame it, and what it all means for Aussie asset prices. Register now

21 July 2022

Australia & New Zealand Chart Book

Steeper interest rate hikes and larger house price falls

Hawkish shifts by the RBA and the RBNZ in recent weeks have prompted us to forecast an even more aggressive hiking cycle by both central banks in the months ahead. Both central banks hiked rates by 50bp at their latest meeting and we have now pencilled in further 50bp rate hikes in the months ahead. At the same time, house prices have started falling in both countries. House prices are down more than 5% from their November peak in New Zealand. And while prices only just fell in Australia in May, all signs point to the downturn persisting. While we had already expected prices in both countries to decline, the steeper rate hikes we now anticipate will feed through to higher mortgage rates and higher debt repayments. That will weigh heavily on the housing market before long. We have therefore raised our forecast of the peak to trough decline in house prices to 15% in Australia and 20% in New Zealand. And those downturns should cause similar-sized falls in dwellings investment in each country in the years ahead.

9 June 2022

Australia & New Zealand Chart Book

Consumption to surge even as real incomes fall

We now expect Australia’s inflation to rise by more than 6% this year. Even allowing for an acceleration in earnings growth and a further solid rise in employment as immigration resumes, that will result in the first annual fall in real household disposable income since the early 1990s. By contrast, we expect gains in nominal disposable income to continue to stay ahead of increases in consumer prices in New Zealand. Even so, we expect Australia’s real consumption growth to outpace New Zealand’s this year, for two key reasons. First, consumer spending in Australia has only just started to surpass its pre-virus peak but is already well above that watermark in New Zealand. Accordingly, there’s more scope for catch-up in Australia. Second, consumer confidence in Australia has softened but has collapsed in New Zealand, where it reached an all-time low in March. We’ve pencilled in a 6% rise in Australia’s consumption this year, well above our forecast of a 2.8% rise in New Zealand. ANZ Drop-in (18th May, 07:00 BST/14:00 SGT): Join economists from our Australia and Markets services shortly after the release of Q1 labour market data for a discussion about the Australian growth, inflation and monetary policy outlook. Register now.

17 May 2022
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Australia & New Zealand Chart Book

Central Bankers’ confidence dilemma

Inflation is surging in both Australia and New Zealand. That is putting pressure on central banks to hike interest rates to slow the economy and curb inflation. But both the RBNZ and the RBA highlighted waning consumer confidence at their April meeting. While confidence isn’t particularly weak in Australia, it has slumped to record-low in New Zealand.  The details of both consumer confidence reports highlight high inflation as a significant drag on sentiment. With inflation at around 7% in New Zealand but closer to 4% in Australia, that explains why the hit to confidence has been larger in New Zealand. However, we don’t expect the weakness in confidence to derail the recovery in consumption. The household savings rate in Australia remains well above pre-virus levels and retail sales kept rising throughout the first two months of the year. As such, central banks are still likely to prioritise the fight against inflation and opt for aggressive rate hikes.

Australia & New Zealand Chart Book

Broadening price pressures to prompt rate hikes

RBA Governor Lowe noted in a recent speech that the Bank no longer has specific criteria for deciding whether inflation is sustainably in the target range. But he highlighted that along with the actual rate of inflation and the outlook, the breadth of price increases would be important. There can be now doubt that price pressures have broadened: a greater share of prices is now rising at a pace above 1% q/q than at any point since the GFC. Admittedly, just two items – petrol and the cost of new dwellings purchased - accounted for 40% of the 1.3% q/q rise in consumer prices in Q4. However, business surveys suggest that cost pressures have intensified sharply in recent months, so the share of CPI items with strong price hikes is set to rise further. And with trimmed mean inflation set to approach 4%, we expect the RBA to start hiking interest rates in June.  

Australia & New Zealand Chart Book

Inflationary surge prompting monetary tightening

New Zealand’s inflation surged to a 30-year high of 5.9% in Q4. And while Australia’s 3.5% was much lower, it is well above the RBA’s 2-3% target band. Trimmed mean inflation is about one percentage lower, but business surveys suggest it will rise further in Australia. As such, it won’t be long before underlying inflation is above the top end of the central banks’ targets in both countries. Along with the tightness in labour markets, strong inflation is why we expect both central banks to continue tightening policy in the months ahead. In Australia, we expect the RBA to end its asset purchase programme at its February meeting and hike rates for the first time since the start of the pandemic in August. The RBNZ has already lifted its policy rate by 50bp and we have pencilled in a further 125 basis points of rate hikes by August this year.

Australia & New Zealand Chart Book

Omicron won’t hold back consumption for long

The Omicron has lifted new virus cases to a record high, though hospitalisations remain low.  We estimate that there are around 2000 hospital beds available for Covid-19 patients in New South Wales, where cases are rising most rapidly, of which only 300 are occupied. A similar number should be available in Victoria. So far, the authorities are responding with mild restrictions, including mask mandates and QR check-ins. More draconian restrictions on activity could reverse the recovery in spending. But with the household savings rate reaching an eye-watering 20% in Q3 and consumer confidence holding up, it is only a matter of time before consumption bounces back in earnest. Our forecast that consumption will rise by 8% next year is well above the analyst consensus of 4.8%.

Australia & New Zealand Chart Book

Diverging outlook for monetary policy

While the RBNZ has lifted interest rates by 50bp and signalled that as much as 200bp of tightening is still to come, the RBA’s central scenario remains that interest rates won’t be raised until 2024. While we have pencilled in the first RBA rate hike for early-2023, there are good reasons for the RBA to be more dovish. While New Zealand’s household savings rate was back at pre-virus levels just before the latest lockdown, it was still well above it in Australia. And while New Zealand has recently recorded a record trade deficit of 3% of GDP, Australia has recorded a record trade surplus of 5% of GDP. With New Zealand’s domestic demand overheating, it’s no surprise that most measures of core inflation are now at or above the top-end of the RBNZ’s inflation 1-3% target range, whereas underlying inflation in Australia has only recently climbed into the RBA’s 2-3% target range.

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