The Reserve Bank of Australia (RBA) pulled no major surprises today, leaving interest rates unchanged at 1.5%.
It also maintained a neutral bias on interest rates in the final paragraph of the statement, again something that was widely expected by the markets.
Put simply, rates in Australia are going nowhere fast.
However, as usually the case with any RBA meeting, there were several talking points to come from the policy statement, especially in relation to the Australian dollar.
The bank took a more forceful view than what was previously communicated in July, warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
That was the first time in over a year that the bank tweaked its commentary on the currency, suggesting that it is becoming uncomfortable with the Aussie’s recent ascent.
Now that they’ve had time to digest the post-meeting statement, it’s time to see what Australia’s economic community has made of the bank’s not-so-subtle warning about the Aussie’s recent strength.
Let’s find out.
Bill Evans, Westpac
Despite the governor stating “the Bank’s forecasts for the Australian economy are largely unchanged”, it appears clear to us that it will revise down its growth forecast for 2018 from 3.25% to 3% in response to the rise in the AUD. That number is still well in excess of our own forecast of 2.5%. We have arrived at that number despite our underlying assumption that the AUD will fall to USD 0.65 by the end 2018. If we were forced to use an AUD of USD 0.80, we would see the need to further lower our growth forecast.
I am a little surprised that the bank is likely to take this step given generally positive developments around the world economy, the labour market and business confidence since May. It would have been strategically tempting to maintain the 3.25% forecast despite the higher AUD and the accepted forecasted methodology.
This does emphasise how concerned the Bank is likely to have become with the recently stronger Australian Dollar.
Until now, we were clearly of the view that with the expectation that growth would reach 3.25% in 2018, the bank was expecting that rates would need to be increased some time in that year. Whilst aware of that, we maintained our view that rates would remain on hold in 2018 given that as 2018 developed, we expected that the bank would accept that growth was likely to remain below trend precluding the need to raise rates.
We remain comfortable with our on hold call, and can only conclude from the governor’s statement that the Bank is not as resigned to a rate hike in 2018 as may have been the case a month ago.
David Plank, ANZ
Among many changes to the RBA statement from July, perhaps the most notable change is the wording around the AUD. It is now noted that the AUD “has appreciated recently,” with this “expected to contribute to subdued price pressures” and “also weighing on the outlook for output and employment”. What’s more, “an appreciating exchange rate,” presumably from current levels, “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
We continue to see the RBA being on hold for the foreseeable future. The rise in the AUD is acting as an additional constraint on early action by the RBA. Having said this, we do think the balance of risks has shifted notably over the past month or so. The high level of business conditions, the related strength in the labour market, the recent gains in consumer confidence and the ever so gradual creep higher in core inflation suggest that the prospect of an RBA rate hike in, say, the second half of 2018 is rising — if still less than 50/50 and hence not yet high enough to put into our forecasts.
The missing piece of the puzzle is accelerating wage growth. On this score the release of the Q2 Wage Price Index on 16 August is the next key release.
Shane Oliver, AMP Capital
Overall, the RBA’s post meeting statement implies a neutral bias in terms of the outlook for interest rates. On the one hand it continues to see improving global conditions, it still sees a pick-up in Australian growth to around 3% and a gradual rise in inflation, it notes that employment is stronger and its still concerned about property price strength in some cities. But against this it notes that wages growth remains low both globally and in Australia, it notes that this and high debt levels will constrain consumer spending and it has become increasingly concerned about the impact of the rising Australian dollar.
Our view remains that the RBA will be on hold for the next year at least, with risks around the consumer, a housing slowdown, inflation and the AUD preventing hikes but a fading in the drag from the mining investment slump and solid employment growth heading off cuts. A rate hike is unlikely until late next year. However, if the AUD refuses to play ball and continues to rise the timing of a move to higher rates could be pushed into 2019 and rate cuts could be back on the table.
Of course the other challenge facing the RBA is the strength in the Sydney and Melbourne property markets. But clearly if this continues, the RBA’s inability to raise interest rates given the interests of the broader economy would necessitate a further tightening in lending standards by APRA.
Su-Lin Ong, RBC Capital Markets
We drew a few conclusions from today’s decision which are likely to be expanded in the detailed quarterly Statement on Monetary Policy (SoMP) on Friday.
Firstly, key macro forecasts are unlikely to be revised much, if at all. There is some risk that the end 2017 GDP forecast of 2.5-3.5% is edged slightly lower but we note that the partials for Q2 GDP are falling on the stronger side of the ledger and this will not alter the RBA’s expectations for an eventual return to above trend growth. Medium-term GDP forecasts of 2.75%-3.75% are unlikely to shift. Similarly, the core inflation forecasts will likely remain unchanged at 1.5%-2.5% through to end 2018 with an eventual return to the 2-3% target in 2019.
Secondly, we were pleased to see some discussion around the risks to household consumption return to the statement. We continue to hold below trend consumption forecasts for both 2017 and 2018 reflecting a number of structural headwinds which keeps us more cautious on the growth outlook.
And thirdly, the RBA’s shift in language around the currency was reasonably pointed. It noted that “the higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment”. This tightening in financial conditions suggests that the burden will fall on the RBA to support activity justifying the historically low level of cash for some time and despite the shifting global trend. We expect the cash rate to remain at 1.50% through to the end of 2018.
A new addition to the key final paragraph that “The low level of interest rates is continuing to support the Australian economy” coupled with some stronger language around the currency suggests that the current low cash rate is likely to remain for some time. This remains consistent with our base case for official cash to stay at 1.50% for the foreseeable future.
Micheal Blythe, CBA
No surprises with today’s no-change decision. Nor with the generally positive tone of the economic commentary. The main “surprise” was a ramping up in the level of concern about the stronger Aussie.
The RBA has moved from seeing the higher AUD as a “complicating” factor for the economy to one where “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation”. This addition neutralises the more upbeat labour market commentary and will probably be interpreted as a shift in a dovish direction. Not too much should be read into this dialling up in currency concerns. The RBA also notes that its forecasts for the Australian economy are “largely unchanged”.
The RBA last pulled the policy lever in August 2016 – a year ago. We suspect another year of masterly inactivity is in store from here. And any serious debate about lifting rates is unlikely before late 2018.
Sally Auld, JP Morgan
The commentary on the AUD was changed, for the first time since April 2016. While some of the rise in the currency is discounted as a function of USD weakness, there is nonetheless explicit acknowledgement that a stronger currency will contribute to subdued price pressures, as well as weighing on output and employment.
Looking ahead to Friday’s SoMP [statement on monetary policy], the key sentence on the currency was: “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” This suggests that while the numerical forecast ranges might not change in the August SoMP, expectations for the return to 3% growth and above 2% core inflation are likely to have been pushed back.
By not downgrading growth and inflation forecasts, but instead pushing back the return to 3% growth and target consistent inflation, the RBA can justify a further period of inaction. The flexible inflation target allows it such liberties, especially when financial stability concerns remain paramount.
However, this is not a long run equilibrium for the RBA as the inflation target is not infinitely flexible. At some point, if growth doesn’t return to 3% as forecast, then the RBA will need to acknowledge that financial conditions are not consistent with returning the economy to trend or better growth.
Paul Dales, Capital Economics
As has become the norm under governor Lowe, today’s policy statement provided a snapshot of the RBA’s new forecasts that will be published in Friday’s Statement on Monetary Policy when it said “over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3%”. That is similar to the forecast published in May. One tweak is that the RBA decided not to describe the labour market as “mixed”, presumably as most indicators are now pointing in the right direction. Employment growth is rising and the unemployment rate is edging lower. The exception is wage growth. We agree with the RBA’s view that it will remain low for “a while yet”
The bank also reiterated its fairly optimistic outlook on inflation as it expects it to “pick-up gradually as the economy strengthens”. For the first time, however, there was a veiled reference to the expected opening of Amazon in Australia next year as “increased competition from new entrants in the retail industry” is expected to reduce inflation.
Even though the Reserve Bank of Australia today decided not to try and talk the dollar down after it left interest rates at 1.5%, we still think the dollar will eventually weaken from US$0.80 now to around US$0.70. We believe that subdued GDP growth will prevent the RBA from raising interest rates until late in 2019. That would be roughly a year later than the financial markets currently expect.
Regardless of what the dollar does, we doubt the economy will live up to the RBA’s lofty expectations.
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