The RBA's first meeting for 2022 during the week confirmed the end of purchases in its QE program as the Board sought optionality in its messaging on policy for the year ahead (reviewed here). A very strong rebound in the economy since the Delta lockdowns ended has seen conditions in the labour market tighten materially, and with inflation meeting the midpoint of the 2-3% target band for the first time in 7 years, the Board determined the time had come to cease QE purchases. With the program's bond holdings not starting to mature until July, the RBA has delayed making a call on what this will mean for its balance sheet until the May meeting. In the quarterly Statement on Monetary Policy, upgrades to the unemployment and inflation forecasts imply the Bank is on track to meet its objectives sooner, necessitating flexibility in its monetary policy settings. At his 'Year Ahead' speech to the National Press Club, Governor Philip Lowe opened the door to hiking the cash rate in 2022; a prospect assessed by the Bank as being inconsistent with its previous set of forecasts.
Reflecting the impact of the Omicron wave, the growth outlook for 2022 was lowered from 5½% to 4¼% before moderating to a below-trend pace of 2% (revised from 2½%) in 2023, with the latter factoring in the key assumption that the cash rate evolves in a similar, though seemingly less aggressive manner, than the hiking cycle being priced in by markets —something Governor Lowe was dismissive of this week. That reticence comes about due the to labour market being "...within sight of a historic milestone" with unemployment close to falling through 4%, and that objective could be pursued under the current forecast path for inflation. That said, the underlying inflation forecasts were lifted significantly — the rate now expected to peak at 3¼% (+1ppt) by Q2 before easing to the upper end of the target at 2¾% (+0.5ppt) by the end of the year as supply issues ease. It is then seen holding at that pace out to mid-2024, whereas it was previously anticipated to rise no higher than 2½% by the end of 2023. Emphasised by the RBA in its communications throughout the week was that the evolution of wage-price dynamics remains exceptionally uncertain amid pandemic-related factors and a tight labour market. In that context, the Bank is maintaining its "patient" stance, only pledging to act once it has more clarity on the medium-term outlook for inflation. Should inflation pressures increase more than expected or show signs of becoming more persistent, the February Statement notes the Bank "will do what is necessary to maintain low and stable inflation" emphasising that objective as a precondition to sustaining a strong labour market.
Also in Australia this week, a host of data updates were released. Retail sales moderated from a record high level with a 4.4% decline in December's initial estimate. National housing prices recorded their fastest pace of increase since 1989 rising by 22.4% for the 12-months to January as housing finance commitments reset to a new record high level in December (reviewed here). Dwelling approvals closed out the year with an 8.2% rise but still contracted materially over the quarter as the retracement post the HomeBuilder stimulus continued (reviewed here). Meanwhile, net exports look likely to subtract from GDP in Q4, reversing their sizeable contribution to activity in the previous quarter (reviewed here).
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Offshore, with inflation concerns intensifying, the Bank of England and the European Central Bank responded at their respective policy meetings this week. The BoE announced a 25bps rate hike, and with the policy rate rising to the previously stated threshold of 0.5%, it will now turn to balance sheet reduction, confirming that maturing bond reinvestments will cease. A larger rate hike of 50bps wasn't on the radar for markets ahead of the meeting, but that was very nearly the outcome: the decision went the way of a 25bps hike in a 5-4 vote by the Monetary Policy Committee. Further increases in household energy prices and rising traded goods and food prices pushed up the forecast peak in inflation to 7¼% by April 2022 (from 6% previously) in the Bank's latest Monetary Policy Report. As a net importer of energy and traded goods, Governor Andrew Bailey in the post-meeting press conference likened the situation to a terms of trade shock for the UK economy. Complicating matters is that with the labour market tightening rapidly, there is upward pressure on wage costs and there are signs that will continue through the year. Amid that outlook, the MPC was left with a difficult message that a "further modest tightening in monetary policy" is likely over coming months despite rising cost of living pressures.
While the ECB announced an unchanged policy stance this week, its messaging has taken a hawkish turn following a much stronger-than-expected inflation report. January's headline inflation rate was expected to ease from 5% to 4.4% as some pandemic-related factors fell out of the annual calculation, but the pace came out higher at 5.1%. There was at least some respite on the core rate, which softened to 2.3% from 2.6%. In the post-meeting press conference, ECB President Christine Lagarde noted that the risks to the inflation outlook are "tilted to the upside" — the first time the ECB has made such an assessment in many years — and went on to say "the situation has indeed changed" from earlier guidance that pushed back against the prospect of raising rates in 2022. However, President Lagarde did emphasise that the Governing Council's sequencing, which requires QE to have been wound up before rates rise, remained key in its policy deliberations. As a result, markets were on the move expecting that an accelerated tapering schedule will be announced at the March meeting ahead of rate hikes later on in 2022.
Lastly in the US, what was widely anticipated to be a fairly soft report in response to the Omicron wave surprised significantly to the upside of consensus with nonfarm payrolls in January rising by 467k vs 125k expected. Furthermore, revisions over the prior two months boosted payrolls by a net 709k. Helping to explain these outcomes, the BLS outlined in their release that updates to its seasonal adjustment and benchmarking processes were incorporated into this report. Overall, though, underlying labour market conditions are strong: December job openings lifted by 1.4% to 10.9mn, while annual growth in average hourly earnings accelerated from 4.9% to 5.7%. The unemployment rate edged up slightly, from 3.9% to 4.0%, though that was accompanied by a rise in participation, which at 62.2% is still 1.2ppt down on its pre-pandemic level.
