The Reserve Bank of Australia (RBA) kept interest rates unchanged in April – the 11th month in succession.
Because it was seen as a near given by markets, all interest today was on the accompanying monetary policy statement with the RBA taking a slightly more aggressive stance to recent strength in the Australian dollar.
“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” said the bank.
“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” it added, indicating continued strength in the currency would do little to help with Australia’s economic rebalancing in its opinion.
Now that markets have had time to digest the statement, it’s time to see what economists have made of it all. Is it a sign that interest rates will be cut in the months ahead, or just a subtle warning that they may be lowered should the strength in the Aussie persist?
Here’s what’s being said, starting with Westpac.
Bill Evans, Westpac
We are retaining our call that rates will remain on hold for the remainder of the year. That is predicated on the Australian dollar remaining broadly in the 70-76c US range. Factors that will assist the containment of the recent lift in the AUD will be a tightening by the US Federal Reserve in June and ongoing concerns about stability in China. Today’s statement certainly does not identify a trigger level for the AUD to elicit a policy response. We do not envisage a further significant surge in the AUD and remain comfortable with a steady policy outlook.
We can only conclude that a further substantial appreciation in the AUD would be necessary to trigger a policy response.
John Peters, CBA
Today’s post meeting statement re-confirmed the RBA’s conditional easing bias. Beyond that, however, those looking for a more dovish slant from the RBA will be disappointed. The statement was largely a carbon copy of the previous month.
The RBA was stating the obvious that a sharply appreciating AUD would not assist the current economic transition from mining to the non mining growth, and could prove a complicating factor in the transition. But any further sharp uptick into the USD0.80s could cause the central bank some policy “heartburn”.
While the Bank has noted the possible complications of a further rising AUD, the commentary in no way signals any imminent change in current policy settings. Thus, we don’t see any RBA rate cut to deflate the AUD as some commentators have been speculating.
Felicity Emmett, ANZ
The Bank retains its easing bias and is focused on the flow of economic data, especially on inflation and unemployment. As has been the case for some time, it remains ready to cut rates if softer demand conditions require that.
while the Bank is likely to be uncomfortable with the exchange rate at current levels, it is unlikely to react in a mechanical fashion to the stronger dollar. Rather, it will be looking for evidence in the data that the level of the currency is turning into a headwind for growth.
Since last month’s meeting we have revised our forecast rate profile and now expect the RBA to remain on hold at 2% this year and next. We removed our call for two 25bps cuts this year given the firmer footing for the domestic economy and the lower unemployment rate. But inflation is set to remain low for some time, so if demand disappoints either because of a global shock, domestic disappointment, or fading stimulus from the currency, and the unemployment rate edges back up towards 6%, the RBA could come back into play.
Ivan Colhoun, NAB
The RBA has become more comfortable with the global outlook, removing references to uncertainty over the impact of recent financial turbulence in the governor’s post meeting statement. In contrast, the RBA Board seems slightly more concerned with its outlook for inflation, adding “the outlook for inflation” to what the Board will be judging in the period ahead.
Some fairly low level jawboning of the currency was undertaken with the main implication being that the RBA does not want a stronger currency than currently, but at the same time is seemingly ok in rationalising its recent appreciation from higher commodity prices and “monetary policy developments elsewhere” (read lower US Fed rate hike expectations).
At the margin this month’s statement arguably continues a gradual shift towards the RBA being more open to considering another rate cut. That said, there are a number of important hurdles on the activity front that would need to be satisfied, and our central case forecast remains for unchanged policy through 2016.
Scott Haslem, UBS
As we expected given its recent rise, the RBA has renewed its commentary on the AUD, highlighting it as a risk to the ability of the economy to ‘adjust’ over the coming year. There’s now little doubt the RBA views some of the rise in the AUD, due to easier monetary policies elsewhere in the world, as unhelpful.
This does not signal an imminent cash rate cut. However, the AUD’s recent rise does lower the hurdle for the RBA to cut further ahead. The better tone in global markets and data (especially China) suggests the RBA’s words may have only limited impacts for now. Our view is unchanged – if rates go anywhere this year it’s lower, but we continue to believe, on balance, the RBA is more likely to hold this year.
Shane Oliver, AMP Capital
Significantly, the RBA singled out the rise in the value of the Australian dollar, which is up 6% since the last meeting, devoting a whole paragraph to the currency as opposed to a single sentence in last month’s Statement. In noting that an appreciating Australian dollar could “complicate the adjustment underway in the economy”, the RBA has effectively reintroduced a subtle form of jawboning designed to try and push it back down again. The clear implication is that a further gain in the value of the $A could cause the RBA to act on its bias to cut interest rates again.
Our view remains that the RBA will indeed cut interest rates again in the months ahead for four reasons. First, growth is likely to slow back to around 2-2.5% as the contribution from housing fades reflecting falling building approvals (see the next chart) and fading wealth effects at a time when mining investment is still contracting. Second, unemployment is likely to remain relatively high at around 6% with jobs growth slowing. Third, inflation is likely to remain at or below the bottom of the RBA’s 2-3% inflation target. And finally, the recent rebound in the value of the $A is a threat to trade exposed sectors like tourism, higher education and manufacturing helping to fill the growth gap left by a slowing housing sector.
Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the $A could set the scene for a May rate cut, which is our base case, or failing that it could be delayed into the September quarter.