For a meeting where interest rates were left unchanged, the RBA’s February monetary policy statement has certainly got markets taking.
The tone of the statement, reflective of recent volatility across financial markets, reflects a greater degree of uncertainty than when they last met on December 1.
Uncertainty towards whether the outlook for Australia’s labour market, the global economy and interest rate movements in other major monetary jurisdictions were central to their thinking.
The final paragraph of the February statement, often the first item read by seasoned financial market participants, sums up the degree of uncertainty the RBA is now grappling with.
“Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand,” was the Board’s view.
“Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.”
The increased uncertainty saw the RBA retain its mild easing bias, indicating that on the current scale of probabilities a rate cut, rather than hike, remains the more likely outcome.
Now that markets have had time to digest the February statement, it’s time to see what Australia’s economic community has made of it all. Does recent financial market volatility suggest that an undesirable economic outcome is on the way, suggested by the use of the word “portends” within the final paragraph, or will the next move in rates be higher, the view many held prior to today’s announcement.
Here’s just a few of the emails that have hit our inbox in the wake of the RBA’s cautious statement.
Bill Evans, Westpac
Through all this market volatility and confident market pricing that RBA rate cuts could be expected as early as November last year Westpac has held the line that rates would remain on hold for the second half of 2015 and throughout 2016. There is not enough in today’s statement for us to change that view. In terms of the key issues highlighted by the Governor we do not expect to see a sustained continuation of current market volatility and certainly do not anticipate financial volatility substantially weakening domestic demand. We do accept that recent job reports have run somewhat ahead of our expectations and anticipate a modest (catch up) lift in the unemployment rate over the course of the next six months. That development alone will continue to give markets hope that the RBA will cut rates further but we do not believe that the conditions will be there to drive that eventual result.
Gareth Aird, CBA
Our views on the labour market and inflation underpin our expectations that the cash rate will stay at 2.0% in 2016.
The single biggest risk to the global economy is a hard landing in China which would have a material negative impact on the Australian economy. Domestically, the continued decline in mining investment, soft income growth and weak public demand pose the greatest headwinds on growth.
Market attention now quickly turns to the February Statement on Monetary Policy (SMP), published on Friday. In our view, the RBA is likely to leave its growth forecasts unchanged. Near-term headline inflation forecasts are likely to be downwardly revised due to lower oil prices. But underlying forecasts should be left unchanged. We expect the RBA’s unemployment rate forecasts to be revised down.
Felicity Emmett, ANZ
The post-meeting statement was slightly more dovish than we expected, although the initial market reaction suggests the market was looking for something more downbeat. Overall, the statement suggests to us that the Bank sees a number of emerging risks on the horizon, and it remains ready to cut rates if necessary.
We continue to believe that softer demand conditions later in the year will prompt the Bank to provide some further monetary stimulus. The Bank is clearly cognisant of the emerging risks and ready to act if need be. We expect that later in the year, ongoing low inflation and a softening conditions, especially in the labour intensive housing sector, are likely to push the RBA over the line.
The RBA will release its quarterly Statement on Monetary Policy on Friday. We expect there to be much more detail around the RBA’s thinking on the economy and the emerging risks around the global outlook.
David de Garis, NAB
NAB reads today’s Board Statement positively though highlighting the potential risks to the outlook, with the RBA uncertain whether international developments will weigh on the prospects for the domestic economy into 2016. The domestic data to date has continued to surprise with the RBA continuing to note a moderate improvement in the domestic economy with business conditions above average and strong employment figures driving the unemployment rate down to 5.8% – clearly below the RBA’s November forecasts when the Bank expected the unemployment rate to be between 6-6¼%. The RBA notes the prospects for a continuing improvement as “reasonable” though it is not confident given “recent financial turbulence”. Consequently the RBA will be watching developments in the global economy closely.
Scott Haslem, UBS
The RBA’s tone today was slightly more dovish. There’s no doubt they retain a positive bent, highlighting the strengthening in the economy through 2015, better business conditions and the pick-up in jobs growth, suggesting the hurdle to further rate cuts this year remains relatively high. However, the RBA has noted that it is taking time to “judge” the extent the jobs market remains firm, and whether recent turmoil on financial markets leads to weaker global & domestic growth. In addition, the RBA sounded slightly less confident the inflation outlook was going to remain consistent with the target (i.e., that headline CPI would soon return to the target).
We continue to see the RBA on hold this year at 2.0%, but as we expected, recent events have encouraged the RBA to keep an open mind. This Friday’s SoMP and the extent, if any, to which RBA lowers their 2016 & 2017 core CPI and growth forecasts remains key.
Shane Oliver, AMP Capital Markets
While the RBA retained an easing bias on the back of the low inflation outlook, the balancing of more positive domestic developments against recent negative global developments clearly enabled it to remain on hold for now. However, the RBA is clearly concerned about recent global and financial market developments and is waiting for more information in order to be able to judge its impact on global growth and the Australian economy.
Our view remains the RBA will cut interest rates again this year reflecting the risks around the global economy, weaker than expected commodity prices, still subdued growth in Australia at a time when the contribution from housing construction is slowing, a more dovish Fed threatening a higher Australian dollar and continued low inflation. However, this may not come till April or May.
However, whether there is another rate cut or not from the RBA, it’s hard to see rate hikes any time soon. So the period of low interest rates – with the cash rate at a record low and bank deposit rates at their lowest since the 1950s – is set to continue.
Paul Bloxham, HSBC Australia
The RBA has been comforted by the recent lift in the local jobs growth and business conditions. As they noted today, the pick-up in jobs growth has been enough to get the ‘unemployment rate to decline in the second half of the year, even though measured GDP growth was below average’. The improvement in local conditions has, in turn, been enough to keep them on hold in recent months, despite underlying inflation falling to the bottom edge of their 2-3% target band.
However, with inflation low and expected to stay low, the RBA has scope to cut if demand weakens.
It is also clear that the risks to the outlook for demand have shifted more to the downside, given further slowing in China and recent financial market turmoil.
With inflation low, the economy still growing at a below-trend pace and the global risks to the downside, we expect that the RBA may have to cut rates further. We expect a 25bp cut around mid-year (pencilled in for Q2).