We don’t think he’ll mind us saying this, but Glenn Stevens’ 110th and final monetary policy meeting as RBA governor was perhaps his most uneventful.
Given the turbulent economic times he’s seen during his tenure as RBA governor, it’s probably exactly how he would have liked to sign off.
Interest rates were left unchanged at 1.5% and there was no explicit easing bias contained in the accompanying monetary policy statement.
It was, in the absence of a few outliers, completely as expected.
While there were no major surprises in the policy statement, that’s not to say there were no talking points for markets. There were, particularly in relation to the housing market where the board dropped its view that “risks in the housing market had diminished.”
Now that the decision has come and gone, it’s time to see what Australia’s economic community has made of it all.
We start with Bill Evans, chief economist at Westpac, who raised a number of important talking points in his post-meeting note.
Bill Evans, Westpac
We were most interested in how the Governor assessed the housing market in the light of strong auction clearance rates and some evidence of higher price growth in Sydney and Melbourne. Recall that the key assertion in the statement following the August cut was that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”. It is not surprising that this sentence was not repeated in the September statement. Arguably if we had not seen the evidence in the Sydney and Melbourne markets the Governor would have been sufficiently emboldened to repeat that assertion.
The other key theme around housing in the August statement was that “dwelling prices have been rising only moderately over the course of this year”. This statement repeats that assertion with an important qualification: “dwelling prices OVERALL have risen moderately over the past year”. That would appear to be recognition that the term “moderate” no longer applies to some parts of the country, specifically Sydney and Melbourne.
Since the beginning of 2013 when interest rates had dropped to 3.00% the Bank has cut rates on six occasions and all of them have been in the months February, May, August and November. These dates are significant in that they coincide with an update on the inflation outlook and also the release of the Bank’s quarterly Statement on Monetary Policy when the Bank’s forecasts are reviewed. This means that the next possible time of a rate cut would be November this year.
We expect that rates will remain on hold in November. Our forecast for underlying inflation in the September quarter is 0.5% which, following a 0.5% for the June quarter, allays concerns that the Bank may have had (following the 0.2% print for the March quarter) that inflation was tumbling out of control.
We would also like to think that the new Governor might adopt a slightly wider target band (1-3%) when he reaches agreement with the Government on the new Inflation Target. A decision like that would take further pressure off a pursuit of a 2.50% inflation print given current global conditions. It would not be a good policy approach to pursue an unrealistic inflation target at the possible expense of destabilising asset markets and a further increase in in household debt ratios.
Michael Workman, Commonwealth Bank
There were no surprises in the statement. Markets were expecting, and received, a “no change” decision accompanied by a neutral statement without forward guidance. There were only minor, but important differences between the August statement and today’s.
The housing market commentary remains interesting. We believe that the RBA feels obliged to reinforce their general message given the recent cuts to interest rates. The RBA sees the tighter lending guidelines implemented by APRA as reducing the risks that were building in the housing market. Additionally, the large amount of new supply to be delivered over the coming year, mainly apartments in the major cities, should moderate price growth in that segment.
We still expect another RBA rate cut at the November meeting after the next inflation update in late October. After today’s RBA announcement, the markets are pricing in a 34% chance of a November rate cut.
Felicity Emmett, ANZ
Apart from the housing sector, the RBA’s assessment of the economy was largely unchanged.
The paragraph on housing was changed slightly. While the RBA’s factual comments were largely unchanged from last month, its assessment that “all this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished” was removed. Our interpretation of this is that while the medium-term themes remain intact the RBA is slightly less comfortable with recent high-frequency data showing a resurgence of housing strength.
Although there was little guidance in today’s statement, we think that the RBA retains an easing bias given its forecasts have underlying inflation remaining well below the 2.5% midpoint of the target band for an extended period. As well, we think the Bank would be concerned by the sustained fall in inflation expectations.
Our central case is unchanged and we see rates on hold at this point at 1.5%, albeit with a clear risk of further easing. At this stage, we think that the RBA will want to assess the impact of the May and August cuts, with a judgment on the need for further easing depending on the next CPI (due 26 October), as well as labour and housing market data released in the interim.
Ivan Colhoun, National Australia Bank
As is normal in the month following an easing, the final paragraph contained no explicit policy bias. This is not to say that a bias does not exist – with inflation forecast to be below target for an extended period, any signs of weakness in the economy would likely see the RBA ease policy further.
The market was looking for two slight changes in today’s Statement – neither of which eventuated. There was no mention of this month’s slightly improved outlook for capital expenditure – nor acknowledgement that auction clearance rates and house prices have lifted recently, though the explicit sentence about risks in the housing market having diminished was removed. Each reinforces NAB’s view that a further cut in interest rates this year is unlikely. The Bank again notes the considerable supply of apartments coming on stream over the next two years in eastern cities – which presumably will moderate price increases or cause moderate price falls in the apartment space.
NAB has two further interest rate reductions forecast in mid-2017 on the basis of an expectation that the growth outlook will soften in 2018. Without further stimulus, the unemployment rate would therefore begin to rise again.
Scott Haslem, UBS
Last month the RBA continued their normal practice of providing no explicit ‘forward guidance’ on policy at meetings where they adjust rates. However, this month, the statement was ‘near-neutral’ with only a weak easing bias, which is basically identical to their statement in June. This is consistent with our view that the RBA will remain on hold ahead.
Overall, there were only a few minor tweaks to the RBA’s post-meeting statement today. That said, we view it as coming in on the ‘positive’/’near-neutral’ side – and closer to the June statement as we expected – rather than on the ‘dovish’ side. Looking forward we still expect the RBA to hold rates steady.
Shane Oliver, AMP Capital
While the RBA’s statement lacks a clear easing bias it is noteworthy that its June statement was also largely interpreted as neutral with an easing bias only returning (expressed via a reference to the Bank awaiting “further information”) in July ahead of inflation data to be released later that month. So if history is any guide the October statement should be watched for any return to an easing bias ahead of September quarter inflation data due later that month.
Perhaps a surprising aspect of the RBA’s statement is its relatively sanguine comments regarding the housing market. I would have thought the bounce back up in auction clearance rates in Sydney and Melbourne and renewed strength in housing finance would suggest that this year’s rate cuts have reinvigorated the already hot property markets in those cities suggesting the case for another bout of RBA “jaw boning” and possible APRA action to cool things down again. At this stage the RBA appears more comfortable in waiting for surging apartment supply to cool things down.
We remain of the view that the RBA will cut rates again at its November meeting when it reviews its economic forecasts after the release of the September quarter inflation data in late October. The risks to inflation are on the downside thanks to underlying deflationary pressures globally and record low wages growth domestically and the $A is still too high and at risk of further appreciation given the Fed’s endless delays in raising rates again. However, with economic growth holding up very well – data for public spending, sales, profits and inventories released over the last few days points to June quarter GDP growth accelerating further to 3.5% year on year – this is a close call and is now critically dependent on seeing a lower than expected September quarter inflation result.
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