Macro (Re)view (28/4) | RBA to extend hiking pause

US equity sentiment was bolstered by strong tech earnings, though price action was more mixed across Europe and Asia. Rate hikes will be forthcoming from the Fed and the ECB next week, but softer inflation data in Australia should keep the RBA on hold. The Bank of Japan left all settings unchanged as Governor Ueda at his first meeting at the helm announced a wide-ranging policy review would be conducted. 

Domestically, Q1's CPI data reported a disinflationary process is now underway in Australia, which likely confirms the RBA's hiking pause will now be an extended one ahead of next week's meeting. Quarterly inflation for both headline (1.4%) and core (1.2%) printed at their slowest rates since Q4 2021, with annual inflation falling from 7.8% to 7% on a headline basis (vs 6.9% exp) and from 6.9% to 6.6% (vs 6.7%) on the core rate (full review here). 

Easing global inflationary pressures are flowing through to Australia. Inflation in traded goods and services slowed sharply from 8.7% to 6.1%Y/Y on the back of falling prices for fuel and durable goods, reflecting eased supply constraints and softer demand. Separate data showed import prices fell by 4.2% in Q1, their largest decline in more than a decade. The domestic inflation pulse - driven by areas such as health, education and energy costs - is yet to peak, though wages growth in Australia has been less responsive to these cost-of-living pressures than in many other countries, even with very strong labour market conditions.

Overall, the Q1 CPI data validates the RBA's April pause. As highlighted in last week's review, the key for policy would be how the CPI reshaped the RBA's inflation outlook, most notably the 2025 timeline for a return to the 2-3% target band, which the Board highlighted was a window relevant to its mandate. Decelerating inflation is consistent with that outlook and indicates monetary policy is appropriately calibrated at a restrictive level. 

Over in the US, the Fed is widely expected to hike rates by 25bps to 5-5.25% next week. That expectation firmed after signs of resilience in the economy and ongoing wage and inflation pressures. While Q1 GDP growth slowed to 0.3%q/q (from 0.6%), there remains underlying strength in the US economy. Domestic demand picked up to rise by 0.8%q/q, its strongest lift since Q2 2021, driven by resilient household spending. Meanwhile, inflation remains stubbornly high with the Fed's preferred core PCE deflator printing in line with estimates, leaving the annual pace unchanged at 4.6%. Meanwhile, a tight labour market is keeping wage pressures elevated, with the Employment Cost Index rising by 1.2% in Q1 to 4.9% over the year (from 5.1%).

In Europe, the ECB's meeting next week continues to look like a line-ball call between a 25 or 50bps rate hike. Inflation and bank lending data due on the eve of the meeting could sway things one way or the other. What is clear is that the ECB is hiking into an economy that has stalled, as Q1 GDP growth came in at 0.1% after a flat Q4. 

Australian Q1 CPI 1.4%, 7%Y/Y

Australian inflation is on the way down after peaking at the end of 2022. The disinflationary pulse from offshore, particularly in goods markets, is flowing through to Australia. Underlying inflation pressures eased and will be welcomed by the RBA following its pause in April. 

Consumer Price Index — Q1 | By the numbers 

• Headline CPI was 1.4% in the March quarter, well down from 1.9% in the previous quarter but printing slightly above consensus (1.3%). Annual inflation moderated from 7.8% to 7% (vs 6.9% expected).

• The average of the three underlying CPI measures was 1.3%q/q, down from 1.8% in Q4, leaving the annual pace softer at 6.6% from 6.7%. 

• The key trimmed mean measure was 1.2%q/q — softer than expected (1.4%) — from 1.7% in Q4. The annual pace declined to 6.6% from 6.9% (vs 6.7%). 

Consumer Price Index — Q1 | The details 

Australian inflation moderated from 30-year highs in the March quarter, confirming inflation peaked at the back end of 2022. Both headline (1.4%) and trimmed mean (or core) inflation (1.2%) posted their slowest quarterly rises since Q4 2021. In year-ended terms, headline inflation came down from 7.8% to 7% and the core rate eased to 6.6% from 6.9%. 

In many countries around the world, inflation is slowing after peaking in 2022. An easing of the inflationary pressures generated offshore - a major reason for the surge in inflation in Australia over the past year - is starting to flow through to domestic prices. 

This is evident in tradables inflation - prices for goods and services bought into the country - slowing sharply to a 0.3% rise in Q1 (its weakest outturn since Q4 2020), cutting the annual pace from 8.7% to 6.1%. This reflects falls in fuel prices from the highs seen following the war in Ukraine and further improvements to the disruptions that had hampered global supply chains through the pandemic. Softer demand for goods has also played a role, with spending rotating to services post the pandemic. 

As a result, goods inflation in Australia slowed to 1.2% in Q1 and 7.6% over the year (down from a peak of 9.6%). This disinflationary impulse means the drivers of inflation are shifting towards services (and to more domestically generated sources). Services inflation was softer in Q1 at 1.7% than in Q4 (2.1%), though the annual pace has yet to top out, ticking up from 5.5% to 6.1%. 

At a more granular level, the major drivers of inflation were from domestic sources, and in services-related areas. This included rises in utilities on the back of surging household energy prices (14.3%q/q) and secondary education costs (4.9%q/q) reflecting rises in school fees.    

Consumer Price Index — Q1 | Insights 

In my view, the key aspect of today's report was the easing in core inflation. While still far above the 2-3% target band, this will be taken as a welcome development by the RBA. The quarterly rate of 1.2% was down from an average pace of 1.7% in 2022. Ahead of next week's meeting, the RBA will be updating its inflation outlook. The current outlook is for core inflation to decline to 4.3% by year-end. And based on today's report, I think that outlook remains on track, which validates the Board's decision in April to pause rate hikes.  

Preview: Australian Q1 CPI

Australian inflation is expected to have moderated in the March quarter (data due at 11:30am AEST) after peaking at 30-year highs in late 2022. Coming ahead of next week's May Board meeting, today's report will be a key input in determining whether the RBA goes on an extended pause or if more tightening is required.  

As it stands | CPI 

Inflation printed at new highs stretching back to the early 1990s in the December quarter. Headline inflation was 1.9% in the quarter, the annual pace lifting to 7.8% from 7.3%. The core rate (trimmed mean) posted at 1.7% in Q4 to be up at 6.9% in year-ended terms from 6.1%. 

Over the past year, home building costs, food, fuel and durable goods have been the major drivers of inflation. But inflation pressures have been broadly based. Prices for around 70% of items in the CPI basket increased at an annualised pace above 3% in the December quarter, a similar level to recent quarters. High inflation in Australia was the result of supply constraints caused by the pandemic and the war in Ukraine against a backdrop of robust demand. Other factors such as flooding along the east coast of Australia and disruptions associated with an extended La Niña system had also played a role in accentuating supply pressures.  

The largest contribution to the 1.9% inflation rate in Q4 came from holiday travel. The peak summer holiday period was the first unaffected by restrictions since 2019 and strong demand for travel pushed up prices for airfares and accommodation. Associated demand at restaurants and cafes added to inflation, with those businesses passing through higher prices to customers. Vehicle prices remained on the rise, reflecting earlier supply constraints.  

Electricity prices rose sharply after government rebates were applied in the previous quarter. New home building costs and fuel prices were still rising, albeit at a slower pace than earlier in the year, sharply reducing their respective contributions to inflation. Low vacancy rates in the capital cities led to upward pressure on rents, which were rising at their fastest quarterly rate in around a decade. 

Market expectations | CPI

The monthly CPI indicator declined from 8.4% in December to 7.4% in January and then to 6.8% in February. Slowing inflation reflected price pressures easing in several key categories including fuel, holiday travel, food, clothing and footwear and household goods, providing convincing signs that inflation peaked in Q4. 

For Q1, the consensus estimate is for headline inflation to print at 1.3% (range: 1.2% to 1.7%), with the annual pace slowing to 6.9%. These outcomes are in line with the readings from the monthly CPI indicator. The 3-month change in the CPI index to February was 1.3% and the 12-month pace was 6.8%. Core inflation on the trimmed mean measure is expected to be 1.4% quarter-on-quarter, leaving the annual pace softer at 6.7%.   

What to watch | CPI 

Today's report will be influential in shaping the RBA's inflation outlook, with updated forecasts due to be presented to the Board at the May meeting. The February forecast round projected a timeline of mid 2025 for both headline (3%) and core inflation (2.9%) to return to the 2-3% target band. 

At the April meeting, the Board paused its tightening cycle awaiting further data and the updated forecasts. A speech from Governor Lowe and the April meeting minutes have indicated the Board's reaction function is anchored by the strategic view that inflation will gradually come back to the target - consistent with its medium-term horizon for monetary policy - as it aims to preserve the gains made in the labour market. 

In my reading of the situation, the RBA will be prompted to start hiking again if today's report leads to its inflation outlook being revised upwards, resulting in a slower path back to the target band. On the other hand, if the report is consistent with either the current or a faster trajectory, then an extended pause is likely.      

Macro (Re)view (21/4) | On the fence

Markets were little changed this week; neither the bulls nor the bears taking the upper hand with the data flow limited and uncertainty continuing to cloud the outlook for economies. Stronger-than-expected data from China on the back of the reopening (Q1 GDP up 2.2%) was unable to boost Asian equities. In the US, Fed members' views have coalesced around a May rate hike followed by a pause, the length of that pause being the key question going forward. The ECB is set to continue hiking while labour market and inflation data in the UK has likely delayed a pause from the BoE. Next week's calendar includes Australia's Q1 CPI report - a crucial input that will either validate the RBA's pause or prompt the Board to hike again in May - Q1 GDP reports are out in the US and euro area, with personal consumption data also due in the US. 

RBA leaving its options open 

Matters pertaining to the RBA were front and centre in Australia. The minutes from the April meeting revealed that the debate between a pause or a 25bps rate hike was finely balanced. Ultimately, a pause in the tightening cycle was upheld to allow the Board more time to assess the incoming data and to wait on a revised set of economic forecasts to be prepared by RBA staff for the May meeting. 

Post the April pause, Governor Lowe noted in his Press Club address that the Board had taken a strategic decision regarding rates whereby it was prepared to tolerate inflation coming back to the target more gradually than some of its central bank peers (especially those with single price stability mandates) in order preserve the gains made in the labour market. The April minutes indicated that a mid-2025 horizon for inflation returning to the target band - consistent with the current forecasts - was as patient as the Board was prepared to be.  

In that respect, it would appear that an upward revision to the inflation outlook is the catalyst that would see the RBA start to hike rates again in May (or at subsequent meetings). That elevates next week's Q1 CPI report to an input that will be key to determining if rates are set to enter an extended pause or if they will need to move higher. At this stage, the message is that the RBA is leaving all options on the table and will respond to the incoming data. 

Also this week, the government published the findings from the independent review of the RBA it commissioned in July last year. In summary, while the review recommends changes to the composition of the Board responsible for setting monetary policy, as well as other operational matters including a reduction in meetings (12 to 8) and regular post-meeting press conferences. the most important point is that the monetary policy framework - what the Board is tasked with achieving - is not set to fundamentally change. The review endorses the retention of the dual objectives of 2-3% inflation and full employment (but argues against a third overarching objective relating to prosperity and welfare being a direct goal for monetary policy), though it calls for greater transparency in how the Board is using its tools to achieve these goals. 

Fed not at the end yet 

A host of officials from the Federal Reserve spoke publically over the course of the week, the common theme indicating the FOMC remains minded to hike rates further in May. The likes of the New York Fed's Williams and the Atlanta Fed's Bostic said they were in favour of a May hike followed by a pause, while the Cleveland Fed's Mester in advocating for higher rates conceded that the tightening cycle was approaching its end. Markets are on board with a final hike in May, but they expect the pause to be short-lived with around 50bps of rate cuts priced in for the back half of the year. That is at odds with the extended pause the Fed has commuincated is the likely path after May. 

Data to delay BoE hiking pause   

Stronger than expected inflation and wage data in the UK looks likely to delay a pause in rate hikes from the Bank of England, with a 25bs hike fully priced for the May meeting. Headline inflation eased from 10.4% to 10.1%yr in March, falling short of the consensus forecast for 9.8%, while the core rate was unchanged at 6.2%yr (vs 6% exp). The peak for headline inflation came in October (11.1%), easing since then on the back of cooling goods inflation (14.8% to 12.8%yr in March), though it should now start to fall more rapidly reflecting the effects of the government's price cap on energy bills. However, services inflation at 6.6%yr remains around its highs and is yet to soften.

Meanwhile, the labour market remains in robust shape. Over the 3 months to February, employment surged by 169k, well above the consensus forecast (50k), which kept the unemployment rate low at 3.8% (vs 3.7%) and the pace of wages growth elevated at 6.6% (vs 6.2%). Services inflation and wages growth are the two key inputs the BoE has said it will react to if they point to the risk of persistent high inflation, making the May meeting an unlikely juncture to pause. The MPC will, however, have the benefit of updated forecasts at the next meeting to signal a shift in its approach is nearing, with inflation expected to fall sharply over the coming year amid a weak outlook for growth. 

No trade-off for the ECB  

While the ECB's March meeting took place as the strains in banking systems were unfolding, the published account of the meeting depicted a Governing Council that remained determined with respect to fighting inflation. The message delivered by ECB President Christine Lagarde back in March that there was no trade-off between financial stability and monetary policy was reiterated in the account. The prevailing view was that unless credit tightened in a material way, the inflation outlook called for further rate hikes. But there was a sense that the Council is preparing to slow the pace of hikes given the uncertainty around both growth prospects and the inflationary trajectory, reflected in the decision to move away from providing forward guidance for rate hikes in favour of a more data-dependent approach. .

Macro (Re)view (14/4) | Cautious progress

Price action reflected a mildly positive tone for risk sentiment this week. On the one hand, volatility continues to calm after the banking turmoil in March, supported by strong earnings from some of the major US banks. But on the other, sticky price pressures in the US likely keeps the Fed's focus on hiking rates as the data showed further signs of a slowing economy. Indeed, the March meeting minutes revealed a "mild recession" in the US is being factored into the Fed staff's baseline outlook. The FX market reflected these mixed narratives: risk sentiment supporting the Euro and the Australian dollar but the safe haven Yen also advancing.

IMF downgrades global growth 

In its April outlook, the IMF lowered its forecasts for global growth this year (2.8%) and next (3%), slowing from its pace in 2022 (3.4%). The group expects the advanced economies will drive the slowdown, with the UK falling into recession (-0.3%) this year and weak growth in the euro area (0.8%); the US is anticipated to be more resilient (1.6%). Overall, the IMF characterizes the outlook as fragile, highlighting that core inflation pressures have yet to abate risking further rate hikes at a time when financial conditions could also tighten following the bank failures in the US and Europe. 

Australian labour market remains robust

This week's Australian labour market data for March outperformed expectations, confirming the strength in the February report was more than a post-holiday rebound (reviewed here). Employment lifted by a further 53k in March - well above the top end of the range of forecasts - following February's sharp 63.6k increase. These outcomes have reaccelerated employment growth to 3.1% on a 3-month annualised basis, returning to the sort of momentum it had prior to the summer slowdown. Reaccelerating employment also kept the unemployment rate at 3.5%, around a 50-year low, as the participation rate lifted to 66.7%, a near-record high.

Resilience was also a theme in the NAB Business Survey, with the conditions index remaining well above average at a +16 reading in March. That was supported by a rise in trading conditions (+26) and while the employment (+10) and profitability (+13) subcomponents eased, both are at very elevated levels. However, weakness in business confidence (-1) reflects concern over the durability of current conditions. Consumer confidence continues to remain at weak levels, though the Westpac-Melbourne Institute index surged 9.4% higher in April following the RBA's rate-hiking pause. 

Fed assesses risks post bank failures  

The Fed's March meeting minutes showed the expected effects on financial conditions following the failures of SVB and Signature Bank were factored into the FOMC's decision to hike rates by 25bps. The preliminary view of the Committee was that credit availability would become tighter for US households and businesses, weighing on growth, employment and inflation. Fed staff went a step further presenting an outlook to the Committee that had a "mild recession" starting later this year as its base case. Given all this, a 50bps rate hike - considered worthy of consideration based solely on the incoming data - was taken off the table, and "many" members had lowered their forecast for the peak policy rate.   

Since the March meeting, liquidity strains in the banking system have eased. The latest data reported use of the Fed's liquidity facilities had declined for the fourth week in succession, to $139.5bn from $164.8bn a month earlier. That situation has seen the focus turn back to the data, in particular this week's CPI report for March. Headline inflation printed south of expectations at 0.1% month-on-month, driving a fall from 6% to 5% on an annual basis. But a 0.4% rise on the core rate saw the annual pace tick up from 5.5% to 5.6%, leading markets to expect a May rate hike. Falls in food, energy and goods prices are driving a disinflationary pulse in the US, but services prices are still elevated (7.2%yr). The driving component for services has been housing, though rents may be starting to ease after posting their slowest month-on-month rise (0.5%) in almost a year. 

ECB likely to press on hiking  

An ECB sources article from Reuters indicated the central bank was likely to continue hiking rates at the upcoming meeting in May, though with the pace of the next hike slowing to a 25bps move. The article suggested there was a range of factors supporting a slower pace of rate hikes, with increased caution appropriate given the uncertainty of the outlook. 

Over at the Bank of England, Governor Bailey gave a speech at the IMF in Washington. Amidst the banking strains elsewhere, the governor made the point that financial stability concerns should not be a constraint on the MPC in setting interest rates.    

Australian employment 53k in March; unemployment rate 3.5%

Australian employment came in well above expectations rising by 53k in March after February's post-holiday rebound (63.6k). Employment growth has reaccelerated as labour demand remains resilient to a slowing economy. The unemployment rate (3.5%) remains close to its lowest level in half a century and the participation rate is around record highs.  

    

Labour Force Survey — March | By the numbers

• Employment increased (on net) by 53k in March, well above the 20k lift expected, and backed up the sharp 63.6k rise in February.   

• National unemployment rate was steady at 3.5% (vs 3.6% expected), around its lowest level since 1974; however, both the underemployment rate (5.8% to 6.2%) and the total underutilisation rate (9.4% to 9.7%) lifted. 
• The participation rate lifted 0.1ppt to 66.7%, just below the record high (66.8%) seen last June. The female participation rate rose to a record high (62.5%). The share of Australians in work is around its highest level on record after rising to 64.4% in March. 

• Hours worked softened slightly (-0.2%) coming off their 3.8% surge in February post the summer holiday season. 

Labour Force Survey — March | The details

Despite a soft start to 2023, Australian employment reaccelerated over February (63.6k) and March (53k). Full time employment increased by a further 72.2k to follow up February's 79.2k rise; part time employment, in contrast, declined by 34.8k over the past couple of months. 

The reacceleration resulted in employment rising by 106.1k in the March quarter, its largest increase since Q2 last year. Furthermore, the 3-month annualised pace elevated to 3.1%, indicating employment growth has returned to the same sort of momentum it had before the summer slowdown. 

Post the pandemic and with borders reopened, growth in Australia's working-age population has lifted to be running at its fastest pace (2.3%yr) since 2009. Inward migration is likely boosting Australia's participation rate, which lifted in March to 66.7%, close to its record high. Similarly, the employment to population ratio (share of the working-age population in work) advanced to 64.4% and is also near its historic high. Both measures are up sharply on their pre-pandemic levels: the participation rate is up 0.9ppt and the employment to population ratio has surged 2ppts, reflecting the additional labour that strong employment growth has been able to draw into the labour force. 

Robust employment growth kept the national unemployment rate at 3.5% in March, around its lowest level in half a century and well down from its pre-pandemic level of 5.2%. There was some easing in the underemployment rate (+0.4ppt) to 6.2% and in the total underutilisation rate (+0.4ppt) to 9.7%, though both measures remain substantially lower than in March 2020 when the underemployment rate was at 8.7% and underutilisation was 13.9%.   

Higher underemployment and underutilisation came on the back of a 0.2% decline in hours worked in March, unable to advance after rebounding sharply in February. This left hours worked down by 0.4% in Q1, a sign that output growth may have slowed further in the March quarter. 

Labour Force Survey — March | Insights

Today's report confirmed the strength in employment in February was more than a post-holiday rebound, as labour demand remains robust despite slowing economic conditions. The unemployment rate remains around its lowest level since 1974, coming all the way in from above 5% on the eve of the pandemic. Broader measures of spare capacity, however, have eased and this may potentially keep the RBA on the sidelines with wages growth assessed to be at a pace consistent with a return to 2-3% inflation.    

Preview: Labour Force Survey — March

The ABS is due to publish Australia's Labour Force Survey for March at 11:30am (AEST) today. Conditions in the labour market returned to strength in February after slowing during the summer holiday period. Employment rebounded sharply to drive the unemployment rate back down to half-century lows. In today's report, employment is expected to moderate leading to a slight rise in the unemployment rate.    

As it stands | Labour Force Survey

Labour market activity saw employment and hours worked rebounding strongly in February. As the peak summer holiday period wound down, around 4.9 million Australians returned to work from annual leave in the month. With many people starting new jobs, employment increased sharply by 64.6k - its strongest net gain in 8 months - more than reversing the declines in December (-16.6k) and January (-10.9k).

Reflecting the rebound in labour market activity, hours worked surged by 3.9% to post its fastest month-on-month rise in a year. Hours worked in February were at a similar level to October-22, up more than 8% on their pre-pandemic baseline. 

On the back of the strength in employment, the national unemployment rate fell back to 3.5% from 3.7%, retracing its rise in January to be around its lowest since 1974. Both the underemployment rate (5.8% from 6.1%) and the underutilisation rate (9.4% from 9.8%) also declined after rising over December and January. Alongside a labour market that was tightening again, the participation rate rebounded to 66.6%, just below the record high from November-22.   

Market expectations | Labour Force Survey

Employment is forecast to rise by 20k in March on the median estimate, with the range for the outcome between 10k and 45k. The lead from the ABS's payrolls series indicates employment continued to rise at a solid pace following February's rebound. In spite of that, the unemployment rate is anticipated to lift from 3.5% to 3.6% (range: 3.4% to 3.7%).    

What to watch | Labour Force Survey

The pace of employment is the key focus as growth in the working-age population has accelerated post the pandemic and reopened borders to be running at its fastest clip since 2009. The RBA and most forecasters expect unemployment will rise later this year as a slowing economy becomes a headwind for employment. On the plus side, job vacancies remain elevated and while they have eased from their highs, labour demand still remains very robust.  

Macro (Re)view (7/4) | Uncertainty builds

Further signs of a slowing US economy weighed on risk sentiment globally amid the fallout from the stresses in the banking system and with the Fed indicating it will continue to hike rates. A reappraisal of hard landing prospects in the US lowered bond yields, but equities did not rally off the back of the move. Domestically, the RBA elected to pause its tightening cycle, in stark contrast to a surprise 50bps hike from the RBNZ. Highlights on the calendar next week include US CPI, the FOMC meeting minutes and Australia's Labour Force Survey.   

US economy cooling 

Data through the week were consistent with a slowing US economy, but with conditions holding up for now. Nonfarm payrolls posted a 236k rise in March (vs 230k expected), a solid rise but well down from the gains in January (472k) and February (326k). The supporting detail was the most impressive component of the report, with falls in both the unemployment rate (3.6% to 3.5%) and the broader underemployment rate (6.8% to 6.7%) coming alongside a rise in the participation rate (62.5% to 62.6%); notably, participation in the 25-54 years category remained at 83.1%, in line with its high pre-pandemic high in early 2020. From the perspective of wage pressures, softer growth in average hourly earnings from 4.6% to 4.2%yr and a decline in job openings to 9.9m in February will be welcomed by the Fed, though that appears unlikely to deter the FOMC from hiking rates in May. 

Many, though, are pointing to the lagged nature of the payrolls data and are focusing on more concurrent indicators. Here, the ISM services gauge slowed from 55.1 to 51.2 in March, remaining in expansionary territory but with the pace of growth slipping below the 12-month average (54.9). That came as growth in new orders slowed sharply (62.6 to 52.2), with business activity (55.4) and employment (51.3) also softer in the month. Meanwhile, the ISM manufacturing gauge saw its 5th consecutive month in the contractionary range (46.3).       

RBA pauses to take stock  

The rate-hiking cycle in Australia came to a pause as the RBA left its key rate unchanged at 3.6% this week. My detailed recap of the decision is available here but in summation, the Board elected to hold judging that the cumulative rise in rates of 350bps had lifted the cash rate to a suitably restrictive setting and that the full effects of tighter monetary policy were still to play out. The Board softened its tone on the prospect of further rate hikes to "may well be needed" from a more definitive line of "will be needed" at the previous meeting, amplifying the message that the incoming data holds the key to the direction of policy. 

Expanding on the decision in a speech, RBA Governor Lowe said the Board was returning to a strategy used in previous tightening cycles: raising rates for a period then stepping back to take stock of the effects on the economy. In this cycle, Governor Lowe said the Board needed to be particularly mindful that: stresses in banking systems overseas would be a headwind for global growth; household spending in Australia had already "slowed considerably"; and wage and price-setting developments were not presenting as consistent with entrenching a high inflationary environment. 

In the post-speech Q&A, Governor Lowe said that while other central banks may continue hiking rates to drive a faster return of inflation to their respective targets, the RBA was aiming to preserve much of the pandemic-rebound employment gains, noting also that the larger share of mortgages on variable rates had accelerated the pass-through of monetary tightening in Australia. In that respect, the RBA's Financial Stability Review noted that while most households are in a position to withstand the rise in interest rates, a sharper-than-expected increase in unemployment would tip more households and businesses into financial stress. 

The latest round of domestic data continued to reflect the impact of softer demand associated with higher rates and cost-of-living pressures. Housing finance fell a further 0.9% in February to be down by a third from the peak in early 2022 (see here); finance for new home building is a notable point of weakness, reflected in weak building approvals data (see here). Meanwhile, the trade surplus widened to $13.9bn in February, though this was driven by a slump in imports consistent with weakening domestic demand (see here).  

ECB and BoE keeping options open 

Commentary from the chief economists at the ECB and BoE suggested both central banks needed to retain an open mind with policy settings. The ECB's Lane noted that a further rate hike in May "will be appropriate" if the euro area economy was still tracking in line with economic projections it published in March, though there was uncertainty around how the banking stresses would impact conditions. BoE Chief Economist Pill outlined in a speech the various crosscurrents that he was weighing up. Pill is attentive to risks of persistent inflation, though he is also wary of the implications of tighter financial conditions stemming from the banking stresses and the terms of trade shock that continues to hit the UK. 

Australian trade surplus widens to $13.9bn in February

Australia's trade surplus widened to an 8-month high of $13.9bn in February. Weaker demand conditions and goods disinflation have hit import spending, which saw its sharpest monthly fall since 1984. Export earnings are off the highs from the middle of last year as commodity prices have eased but are still elevated.  

International Trade — February | By the numbers

• Australia's trade surplus increased to $13.9bn in February from $11.3bn in January (revised lower from $11.7bn). A slight narrowing to $11.2bn was expected.   

• Exports declined by 2.9% to $57bn (12.2%yr), pulling back from a 1.4% lift in January.  
• Imports slumped 9.1% coming in at $43.2bn (-0.5%yr), more than reversing January's 5.5% increase.   

International Trade — February | The details

Import spending plunged by 9.1% — its sharpest month-on-month fall since April 1984 — driving a $2.6bn widening in the trade surplus in February. Export revenue also declined in the month (-2.9%). February's trade surplus was the third highest on record at $13.9bn, but the weakness in imports is broadly reflective of softer domestic demand conditions as spending has lost momentum against headwinds from RBA rate hikes and cost-of-living pressures. 

The heavy fall in imports came across both goods (-9.9%) and services (-5.4%). That profile reflects weaker demand with the post-Covid rebound having faded and eased supply chain pressures contributing to falling goods prices. Consumption goods (-19.9%) backslid to their lowest since January-22 on broad-based category falls, including vehicles (-35.1%) and clothing and footwear (-9.2%). 

Capital goods fell sharply (-14.6%), albeit after rising strongly in December (12.5%) and January (10%), driven by transport (-38.6%) and telecommunications equipment (-27.3%). Lower input prices and weaker demand continue to weigh on intermediate goods (-1%), falling to a 10-month low. The rebound in international travel continues, though it has lost some momentum of late, which has weighed on services imports.  

Exports (-2.9%) fell for the 4th time in the past 5 months. Unlike imports, this weakness has been driven entirely by goods, with those exports down a further 3.4% in February. Non-rural and rural goods have been the driving factor as prices for Australian export commodities have come off very elevated levels. 

In February, non-rural goods fell 4% on the back of a slide in iron ore exports (-9.5%), though rural goods bounced (3.4%) to stem a run of declines. Services exports increased for the 16th month running, though February's 0.5% lift was the slowest rise in a year. Inbound tourism is still down 24% on end-2019 levels of spending.    

International Trade — February | Insights

Although the trade surplus widened significantly, this reflected underlying weakness in imports that is consistent with the slowing seen in domestic demand, which stalled in Q4 (see here). Falling goods imports are also providing an indication that the declines in goods prices seen in other countries as supply chain pressures have eased are starting to flow through to Australia. While commodity prices have retraced, export revenue remains very elevated.