The RBA surprised no one today by leaving interest rates unchanged at 2.00%, continuing the pattern set since May last year.
While that was all but a given in the minds of investors, the accompanying monetary policy statement provided plenty for markets to ponder with the bank seemingly inching towards, rather than away, potentially cutting interest rates further.
Having had time to digest the March statement, it’s time to see what Australia’s economic community made of it all.
Here are just a few of the research notes hitting our inbox this afternoon.
Bill Evans, Westpac
In recent statements, its easing bias was expressed with the sentence “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”. This sentence has been moderated to replace the “may” with a “would”. Given that this is the key sentence in the statement, it seems unlikely that changing the key verb would be a fine tuning decision. The word “would” seems stronger than “may”, and therefore we can only conclude that the Bank has somewhat strengthened its easing bias.
By choosing to strengthen the statement bias, it appears that there is more concern around those issues than was the case in February, partly driven of course by the surprise rise in the unemployment rate from 5.8% to 6.0% in January.
We believe the Board is still some way away from delivering on this easing bias. It has ample time to be convinced, particularly about the labour market and the impact of global financial turmoil. It will also be monitoring developments in the Chinese economy and at the US Federal Reserve.
Our own forecasts around these issues support a steady policy outlook. However, we cannot ignore the decision to strengthen the language around the easing bias.
Michael Blythe, CBA
Today’s post meeting Statement re stated the RBA’s conditional easing bias: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”. 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 Bank’s views on the global economy were not downgraded, the Banks characterisation of financial market volatility was not changed and the Bank still sees the non mining economy strengthening and labour market conditions improving. There was no evidence of any renewed concern about AUD levels.
Beyond our activity/inflation views, there are a range of influences that suggest the hurdle to a rate cut is quite high.
The CBA house view is that the cash rate is left at 2% through 2016. If the economy unfolds as we expect, the RBA will not need to act on its conditional easing bias.
Felicity Emmett, ANZ
Looking forward, the RBA is likely to be watching the global data to determine whether the recent financial market volatility has presaged real weakness in the economic outlook. Domestically, the labour market data are always important, and after a significant downgrade to the RBA’s unemployment forecasts in February a stabilisation at 6% would effectively be a disappointment. Activity indicators like business conditions and retail sales will also be important to determine the path of monetary policy.
The behaviour of the property market will also be an important input into the Bank’s deliberations over the next few months. The housing market has got off to a surprisingly good start in 2016, with Sydney’s auction clearance rate jumping back to around 75% in February. A second wind for the frothy Sydney market is not something that the Bank would have been counting on and if sustained raises the hurdle for further monetary policy easing.
We still believe that softer demand and low inflation will see the Bank provide some further monetary stimulus this year. For some time we have had 25bp cuts pencilled in for May and August. The risks are tilted towards a later move, but if the improvement in the unemployment rate stalls we expect the RBA will feel uncomfortable sitting pat with inflation at the low end of the target band.
Ivan Colhoun, NAB
There were very few changes to the Statement (as is normal given there is relatively little data released during February) and what changes there were we would characterize as either cosmetic (“may” to “would”) or necessary for accuracy reasons (the dropping of the reference to above-average business conditions and a decline in the unemployment rate).
That said, the RBA reiterated that it is watching two developments very closely, in deciding whether to further ease monetary policy, namely: whether the improvement in labour market conditions is continuing and whether recent markets turbulence signals weaker global and domestic demand.
At face value, between December and February, the Bank appears to have become more open to the possibility of further cutting interest rates. There wasn’t really a significant Australian development to motivate this change of language, suggesting the Bank’s staff and/or Board has primarily been affected by global market and policy developments.
We’re sticking with our unchanged forecast for the RBA in 2016, though we acknowledge that in recent months the RBA has been on heightened alert.
Scott Haslem, UBS
As we expected, the RBA last month took a step in the more dovish direction, but still maintained their positive bent, highlighting the pick-up in the economy through 2015 and the better jobs market. This month, the key messages are unchanged, and the RBA retains its easing bias.
At the margin, and acknowledging the risk that over-interpreting every word change merely causes a tense smile at the RBA, it is more likely one can cage this month’s RBA prose as marginally more dovish (than hawkish), given they removed some of the now less positive data flow comments (without replacing them, which they could have), while seemingly sounding more certain that continued low inflation “would” (rather than last month’s “may”) provide scope for further easing. Of course, they also ignored last month’s rise in unemployment and weak capex survey, and made little substantive attempt to talk down the AUD (as many had forecast).
Our view is unchanged – if rates go anywhere this year it’s lower, but we continue to believe, on balance, the outlook is one that will more likely see the RBA hold.
Shane Oliver, AMP Capital
In removing a reference to above average levels for survey measures of business conditions and in saying that “continued low inflation would [as opposed to “may” in the February Statement] provide scope for easier policy, should that be appropriate…” the RBA appears to have strengthened its easing bias somewhat.
Our view remains that 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 May. Given the RBA’s focus on inflation the March quarter CPI to be released in late April will be worth watching.