The Reserve Bank of Australia board believes the economy is expanding more rapidly than previously anticipated, but is sticking to its prediction that interest rates will remain at record lows until 2024.
It wants to see inflation sustainably within its two to three per cent target, which will need a further decline in unemployment and wages growth above three per cent compared to 1.5 per cent now.
“The board viewed these conditions as unlikely until 2024 at the earliest,” the minutes of the RBA’s June 1 board meeting reiterated.
But Commonwealth Bank of Australia chief economist Stephen Halmarick predicts wages growth will be higher than the RBA is expecting and inflation will be back in the target band by the end of next year.
“We think the risk is for a cash rate rise earlier than 2024,” he told a Committee for Economic Development of Australia online event on Tuesday.
The RBA minutes said the recovery has been the result of favourable health outcomes and substantial fiscal and monetary policy support, and that uncertainty around the outlook had declined.
Treasurer Josh Frydenberg agreed.
“The economy is tracking in the right direction,” Mr Frydenberg told his coalition colleagues.
RBA members continue to closely monitor developments in the housing market where prices continue to rise, credit growth is growing – especially from first home buyers – and investors have started to re-emerge in recent months.
“Given the environment of strong demand for housing, rising housing prices and low interest rates, members continued to emphasise the importance of maintaining lending standards and carefully monitoring trends in borrowing,” the minutes say.
New Australian Bureau of Statistics figures show the total value of Australia’s 10.6 million residential homes rose by just under $450 billion in the March quarter to $8.3 trillion.
This was the largest rise on record.
Its residential property index of Australia’s capital cities rose by 5.4 per cent in the March quarter to be 7.5 per cent higher over the year.
The average price of residential dwellings was $779,000 in the March quarter up from $739,900 in the previous three months.
CBA expects expects home prices to rise 14 per cent over 2021 and 2022.
The wealth effect of rising house prices, a strong labour market, rising confidence and a surge in household savings are factors supporting a consumer-led recovery.
Mr Halmarick said households benefited from a wall of money through JobSeeker, JobKeeper and pension payments during the COVID-19 recession.
“The weirdest recession ever, because there was more income coming into CBA bank accounts through the recession than there was before,” he told CEDA.
In its latest quarterly Retail Forecasts report, Deloitte Access Economics expects retail spending to have grown by a hefty 5.9 per cent in 2020/21, even after a 0.5 per cent decline between January and March this year.
This will be the strongest growth in a decade.
However, after such a large surge, the forecast for 2021/22 is a more modest 0.9 per cent growth.
“Australian consumers have more options for spending with the easing of restrictions and a need for social contact supporting eating out and other activities at the expense of other retail spending,” Deloitte Access Economic partner David Rumbens said.