Another Reserve Bank of Australia (RBA) monetary policy meeting has come and gone, with the bank deciding to keep interest rates unchanged at 1.5% for yet another month.
In the accompanying monetary policy statement, the only true area of interest at present given rates are unlikely to move anytime soon as the RBA continues a period of evaluation, the board delivered a similarly optimistic assessment on Australian and global global economic conditions.
However, there were a few talking points to come from yesterday’s meeting.
The first is that the RBA thinks Sydney’s property market is slowing. Another is that non-mining business investment is picking up. And, while labour market conditions are strengthening, assisting a recovery in wage and inflationary pressures, it remains concerned that low income growth and high levels of indebtedness will crimp household spending in the future.
Along with the elevated Australian dollar, uncertainty surrounding the household sector and the outlook for the housing market was enough to ensure that rates were left on hold for a twelfth consecutive meeting.
Even with those tweaks, yesterday’s statement delivered few surprises given the muted reaction seen across financial markets.
Barely a ripple was seen following the statement’s release.
While markets weren’t all that interested, it’s time to see what Australia’s economic community has made of it all.
Is there something that the markets have missed, and, if so, does it have any implications on the outlook for interest rate settings?
Let’s find out.
Callam Pickering, Indeed
Labour market conditions and inflation remain the key for monetary policy. Recent employment growth has been stronger than expected and data on job advertisements point towards strength in the coming months. Wage growth, however, remains persistently low despite improved business conditions and profitability.
Until wage growth begins to improve there is no urgency for the Reserve Bank to hike interest rates. Without a strong contributions from wages it is unlikely that annual inflation will push much above the lower end of the RBA’s target band of 2-3%. A higher Australian dollar is also actively working against the RBA achieving their policy objectives.
With both mining investment and residential construction likely to fall in 2017-18, we expect the RBA to leave rates at 1.5% under the second half of next year. Another rate cut isn’t entirely out of the question but looser policy would likely require another significant fall in commodity prices or a decline in house prices in Sydney and Melbourne.
Bill Evans, Westpac
We cannot deny that the partial [GDP] data has generally been constructive. That supports the Bank’s decision to be more optimistic about the growth outlook. We expect that will be further confirmed with the release of the June quarter GDP report where Westpac is forecasting a 1.0% increase, supported by strong consumer and government spending and net export growth.
On the other hand, as indicated in the governor’s statement, risks around the consumer associated with weak wages growth, ongoing spare capacity in the labour market and high household debt still threaten the current growth momentum. Indeed, we expect that these factors along with a downturn in the construction cycle and net services exports are likely to slow momentum through 2018.
We do concur with the bank’s observation that the heat is coming out of both the Sydney and Melbourne housing markets as credit conditions tighten under the weight of increased regulation.
Under these circumstances we do not support current market pricing which points to the beginning of the rate hike cycle in mid 2018. We continue to expect rates to remain on hold in 2018.
Stephen Walters, Australian Institute of Company Directors (AICD)
The statement today sounded a little more upbeat than before on domestic economic conditions, reflecting the recent flow of decent data. In particular, officials mentioned that the outlook for business investment had improved which sounded a little more equivocal.
Officials still expect a gradual pickup in economic growth in Australia although, as before, high household debt and weak real wages growth will be constraints on consumer spending. On housing, prices continue to rise “briskly” although, for the first time, the RBA singled out Sydney’s market for signs that conditions had eased. The labour market comments today were little changed from the statement released back in early August — RBA officials still expect “solid” jobs growth over the period ahead.
As before, today’s statement contained no explicit guidance on the policy rate, but it still seems likely that the next move from the RBA will be a hike. Key housing markets remain hot, wages growth and inflation are poised to lift, albeit slowly, the jobless rate is falling, and the global outlook is firming, which helps to explain the rise in commodity prices. Also, Bank officials probably are keen to dissuade already stretched households from taking on even more debt.
Felicity Emmett, ANZ
There was little substantive change to the RBA’s post meeting statement, although in our view the Bank’s outlook on the domestic economy seemed slightly more positive. The Bank highlighted the improvement in the non-mining investment outlook, and was slightly more upbeat about the near term outlook for the labour market.
We continue to expect the RBA to keep the cash rate on hold for the foreseeable future. The growth outlook has, however, improved over recent months, supported by a better outlook for non-residential construction, both in the private and public sector. This is also helping to support the labour market. The outlook for consumer spending remains a key uncertainty given high debt levels and our expectation that wage growth only very gradually recovers. The labour and housing markets will continue to be the key inputs into the RBA’s monetary policy deliberations, and stronger outcomes in these markets will increase the odds of an earlier than expected move from the RBA.
Shane Oliver, AMP Capital
Basically the RBA and rates are stuck between a rock and a hard place. Strong business confidence and jobs growth, the RBA’s expectations for a growth pick up and worries about reigniting the Sydney and Melbourne property markets argue against a rate cut. But record low wages growth, low underlying inflation, the impending slowdown in housing construction, risks around the consumer and the rise in the AUD argue against a rate hike.
So we remain of the view that the RBA will leave rates on hold at 1.5% out to late next year at least. Speeches by RBA governor Lowe on Tuesday and Friday will also be watched for any clues on the rate outlook.
Su-Lin Ong, RBC Capital Markets
The tone remained upbeat with recent data likely giving the bank greater confidence in its medium-term GDP and inflation forecasts. Some caution, however, remains [relating to] households and the higher currency but this is not new and will be overlooked at this juncture, especially ahead of a likely strong Q2 GDP print.
Recent data have, on balance, been positive — capex, business conditions, labour market — and broadly consistent with the RBA’s base case view for an eventual return to above trend growth and within target inflation. We suspect that they are feeling a little more confident with their forecasts.
While its confidence may be growing, some caution rightly) remains. As has been the case for some time, the RBA again highlighted the challenges to household consumption given the unenviable combination of weak wages growth and high levels of household debt. It also repeated that the stronger currency would constrain growth and jobs. It will remain hopeful that the stronger pace of employment generation will eventually absorb spare capacity and lift wages growth and it will also hope for some correction to the weak US dollar. We, however, have more reservations and continue to think that some headwinds for the consumer are structural in nature with a likely cyclical slowdown in the housing sector also set to impact household behaviour.
Together with continued low core inflation which is unlikely to move much above 2% over the next 12 months, we remain with our base case for the case rate to stay at 1.5% through to the end of 2018.
Ivan Colhoun, National Australia Bank
Today’s statement appears to reflect increasing confidence by the RBA that their forecast improvement in the Australian economy over the coming year remains very much on track.
Most interestingly, the bank notes that forward-looking indicators of the labour market suggest ‘solid’ growth in employment in the period ahead. This is the strongest assessment of the labour market by the Bank for some time and one that aligns with both a strengthening in employment intentions in the NAB business survey and a pick-up in SEEK job advertisements over the past 6-9 months. Improvements in SA, QLD and WA — states accounting for nearly 40% of GDP and employment — have been important in this regard, no doubt reflecting in part better conditions in the mining sector.
The final paragraph which summarizes the monetary policy decision was identical to last month, noting that low interest rates are supporting the Australian economy and that the current stance of policy was seen as consistent with both sustainable growth in the economy and achieving the inflation target across time i.e. there were no hints of any near-term action on monetary policy by the RBA.
However, should the labour market outlook described by the RBA transpire — along with a return of inflation to target — then it would be likely that the Bank’s thoughts, like those of other central banks, will turn to when it should begin to remove some policy accommodation. Indicators of the labour market are likely to be crucial in this assessment. An unemployment rate of 5.25% on the way to the 5% or lower would likely be sufficient.
Michael Blythe, Commonwealth Bank
There has been no shortage of RBA commentary in recent times — cash rate announcements, speeches, monetary policy statements and even a parliamentary appearance by the governor. All have sent a positive economic message and a rates on hold message. Today’s post meeting statement is no exception.
Governor Lowe has now completed his first year in office with a constant cash rate over the period. This is a somewhat unusual outcome. The Governor’s predecessors were quite active in their first years. Not that the lack of activity is a negative. On the usual metrics it has been a good first year. GDP growth and the underlying inflation rate have edged a little higher. And growth rates remain a long way from recession/deflation. Unemployment has inched down.
As noted last month, we suspect another year of masterly inactivity is in store from here. We expect the RBA to leave the cash rate at 1.5% for the remainder of 2017 and most of 2018.
Paul Bloxham, HSBC
The short statement was very similar to the previous month, with identical language on the AUD, for instance. The most notable change was on the labour market, where the central bank stated that ‘stronger conditions … should see some lift in wages growth over time’. This was in addition to the comment, retained from last month, that the current low rate of wage growth is ‘likely to continue for a while yet’. The RBA seems to be in a holding pattern, content that further cuts are not needed but waiting for evidence of a lift in inflation and wages growth before considering hikes. We expect stronger wages growth and underlying inflation to come through over the next few quarters and for the RBA to begin lifting the cash rate in Q1 2018.
Sally Auld, JP Morgan
There is not much new in the statement. With AUD/USD just shy of 80c and scars still running deep from the “special topic” kerfuffle in the July minutes, the RBA would have been careful to keep a neutral bias in today’s communication.
While the labour market numbers hold firm — albeit with the unemployment rate at least 60 basis points above neutral and having moved sideways for the past 18 months — and the central bank still forecasts a return to 3% growth, the RBA’s balancing act between low inflation and financial stability concerns remains consistent with rates on hold for the time being.
Tomorrow’s 2Q GDP print will be the next key marker for the judging the trajectory of the economy. After this week’s partial data, we are now forecasting a quarterly rise of +0.6%. The RBA’s forecast is closer to +0.75%.
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