The RBA's latest interest rate meeting must have been quick

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  • The Reserve Bank of Australia (RBA) kept its overnight cash rate unchanged at 1.5% in October, as expected.
  • It retained a clear neutral bias on the outlook for official interest rates, suggesting there’s unlikely to be a move in either direction for the foreseeable future.
  • There were limited changes to its views on the Australian and global economy.

The Reserve Bank of Australia (RBA) kept its overnight cash rate unchanged at 1.5% in October, maintaining the status quo that’s been in place since August 2016.

The result was widely expected by both economists and financial markets alike.

Indicating that official interest rates are likely to remain at record-low levels for the foreseeable future, the RBA once again delivered a neutral bias in the key final paragraph of the statement.

“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” said RBA Governor Philip Lowe.

“The low level of interest rates is continuing to support the Australian economy.”

Hinting that the RBA still sees the next move in official interest rates as higher, Lowe said that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”, repeating the view from September.

In the remainder of the statement, there were minimal changes on the bank’s views towards the Australian economy. And what changes there were, most reflected data that had been released since the Board last met.

“The latest national accounts confirmed that the Australian economy grew strongly over the past year, with GDP increasing by 3.4%, Lowe said, referring to the Australia’s Q2 GDP report released a day after the RBA’s September policy meeting.

He added that “the Bank’s central forecast remains for growth to average a bit above 3% in 2018 and 2019”, maintaining the view offered a month earlier.

His broader views on the economy were also largely unchanged from September, including that “one continuing source of uncertainty is the outlook for household consumption”.

“Growth in household income remains low and debt levels are high,” Lowe said.

Elsewhere, Lowe’s views on the labour market, wage pressures, the outlook for inflation and the current level of the Australian dollar were near identical to a month earlier.

On current housing market conditions, something that has dominated headlines in recent days, Lowe maintained the view that “conditions in the Sydney and Melbourne housing markets have continued to ease”, seemingly demonstrating little concern about a broader slowdown in other markets seen in recent months.

“Growth in credit extended to owner-occupiers remains robust, but demand by investors has slowed noticeably as the dynamics of the housing market have changed,” he said.

“Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality.”

That suggests while lending standards for more marginal home loan borrowers have tightened as a result of macroprudential restrictions implemented by APRA and Australia’s banking royal commission, the RBA is not concerned about the potential for a broader credit crunch.

Further contributing to the slowdown in the housing market, Lowe dropped the view that the “average mortgage rate paid is lower than a year ago”, reflecting that some major Australian lenders increased variable mortgage rates in the early parts of September.

“Some lenders have increased their standard variable mortgage rates by small amounts, while at the same time reducing mortgage rates for some new loans,” Lowe said, adding that Australian “money-market interest rates are higher than they were at the start of the year, although they have declined since the end of June”.

Internationally, Lowe also maintained similar views to a month earlier, although he did strike a more hawkish tone when referring to global inflationary pressures.

“A further pick-up in inflation is expected given the tight labour markets, and in the United States, the sizeable fiscal stimulus,” he said. “Globally, inflation remains low, although it has increased due to both higher oil prices and some lift in wages growth.”

The acknowledgement of US fiscal stimulus and higher oil prices were new additions to the statement.

He also noted that “yields on government bonds have moved a little higher, but credit spreads generally remain low.”

More broadly, Lowe described the global economic expansion as “continuing”, maintaining the view from September.

As for downside risks, he again warned that “one ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States”.

There has been limited market reaction to the October policy statement, reflecting that Lowe’s views were much the same as a month earlier.

While Australian economic growth is currently strong, the bank is still yet to be fully satisfied that it will lead to lower unemployment, faster wage growth and stronger inflationary pressures, allowing it to begin normalising policy settings.

The current signals are broadly positive, but it’s not at that point yet.

It is also clearly cautious about what impact higher borrowing costs may have on Australian households spending given “household income remains low and debt levels are high”.

Throw in uncertainty about what impact trade tensions between the United States and China could mean for the Australian economy and it all but ensures policy will be left unchanged until further progress on lowering unemployment is made, or if current trends start to reverse.

Near-term, attention now will turn to upcoming Australian economic data, including retail sales, unemployment and consumer price inflation that will be released in the weeks ahead.

The full October monetary policy statement can be accessed here.

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