The RBA’s first monetary policy meeting has now come and gone, and, as expected, it left interest rates unchanged.
However, it still caught the eye of financial markets.
It was the cautiously optimistic (and somewhat lengthier-than-usual) monetary policy statement that was the real taking point.
- The global economy is improving. Check.
- Australia’s Q3 GDP contraction was driven by temporary factors. Check.
- Australian economic growth is expected to rebound. Check.
- National income is expected to improve. Check.
- Inflation is expected to increase slowly. Check.
- Risks in the housing market are contained. Check.
- The recent rally in the Australian dollar isn’t complicating the economy’s transition. Check.
It sounds almost like a Goldilocks scenario, and suggests that the RBA has little to do in the period ahead based on its own assessment.
Financial markets agree, bidding up the Australian dollar and pricing in a slightly higher probability that rates may be hiked, not cut, before the year is out.
While the RBA and financial markets seem convinced that things are going alright, it’s time to see what Australia’s economic community has made of the February statement.
Is there reason for optimism, or are their tougher times ahead?
Let’s start with Bill Evans, Westpac’s highly-respected chief economist.
Bill Evans, Westpac
This statement clearly sets out the Bank’s current policy approach. That is, to hold rates steady in anticipation of a gradual lift in growth and inflation while imbalances in the housing market remain contained. We expect this thinking will be sustained throughout 2017 being supported by a rising terms of trade, a peaking construction cycle and a gradually falling unemployment rate with rates remaining on hold.
Our central view for 2018 would be a similar policy stance despite clear preferences in the market for the beginning of a tightening cycle. Westpac’s view on growth in 2018 is that is it will slow down to a below trend 2.5% with housing construction contracting, the terms of trade falling, and ongoing moderation in consumer spending and business investment. This pitches the risks to the “on hold” call in 2018 to the downside in clear contrast to current market views.
Gareth Aird, CBA
The RBA has left policy on hold since August 2016 despite the last two quarterly inflation reads printing below target. Put another way, the RBA has not cut rates since Dr Lowe become Governor despite core inflation continuing to run sub-2.0%. Therefore we conclude that the RBA, under new Governor Lowe, is willing to tolerate inflation below the target band if it reduced the risk of financial imbalances and the further build of up debt in the household sector. Dr Lowe, in his capacity as Governor, has made remarks around this on more than one occasion.
We think that the RBA faces a tough job in returning inflation to target. And we don’t expect core inflation to get back to within the target band until 2018. But in our view, the hurdle for another rate cut is higher than it was last year. With the Fed tightening further in 2017, firmer commodity prices, public infrastructure spending lifting and continued strength in the housing market, we see the RBA content to leave rates on hold despite inflation undershooting the target.
The risk, however, sits with easing over the next six months because we don’t see enough strength in the labour market to push inflation materially higher. Any loss of momentum in the labour market, coupled with some cooling in the housing market, could see policy easing come back on the table.
Shane Oliver, AMP Capital
The RBA’s post meeting statement didn’t really provide anything new. The RBA seems a bit more upbeat about the global economy, sees the September quarter GDP slump in Australia as largely temporary, sees inflation remaining low and the labour market as mixed.
Somewhat surprisingly it signalled little change to its growth and inflation forecasts despite the September quarter growth slump. On growth it sees a return to reasonable growth in the December quarter (as we do) and continues to see growth around 3% in the next few years.
Similarly, its level of concern around the property market does not appear to have increased despite a further pick up in lending to property investors and continued rapid price growth in Sydney and Melbourne. The RBA’s commentary around the property market was little changed from that seen in its December post meeting statement.
Overall, the basic message from the RBA remains that it is comfortably on hold at present with a neutral bias regarding future rate changes.
Our view remains that it will take longer for inflation to return to target than the RBA is allowing, particularly with wages growth remaining at record lows and the AUD trending higher. As a result we remain of the view that the RBA will cut rates again probably in May after the next round of inflation data and revisions to the RBA’s inflation forecasts. Given the conflicting forces though, I would concede that our call for another RBA rate cut is a close one.
Felicity Emmett, ANZ
We continue to think that persistently low inflation will keep the RBA on hold for some time. Given the Bank currently only has the mid-point of its underlying inflation forecasts returning to the bottom of the band over the forecast period, our interpretation is that it maintains an easing bias. But the slightly better global dynamics, the lift to national income from higher commodity prices and the risks around house prices suggest that the Bank will not act on that bias.
That said, the inflation outlook is likely to keep the Bank on hold for some time. The Q4 report showed inflation pressures remain muted, and while wage growth looks to have bottomed, there is little indication of any meaningful acceleration any time soon. This, combined with ongoing strong retail competition and slowing rental growth, suggests that any upswing in inflation over the next couple of years is likely to be very modest leaving the cash rate on hold over the next year or so.
Ivan Colhoun, NAB
The statement seemed both a little more upbeat on the global growth outlook (conditions described as having improved in recent months) and reasonably relaxed about the Bank’s view of both the Australian growth outlook and an expected slow return of inflation to the target. The Bank would likely need to change one of these views significantly to alter its policy rate in the near term.
One final debating point was a slight change in terminology in relation to the exchange rate. Whereas previously, “an appreciating exchange rate could complicate this adjustment”, now “an appreciating exchange rate would complicate this adjustment”. Maybe it’s splitting hairs, but would seem stronger wording than could.
Michael Turner, RBC Capital Markets
Governor Lowe delivered a balanced statement to open the RBA’s account for 2017. On the domestic front, Lowe made little fuss over recent price data, and also sounded relatively unperturbed on developments in the housing market. On the global front, growth has picked up a little and commodity prices have risen.
We view the statement itself as neutral, though we expect the forecasts within Friday’s Statement on Monetary Policy to serve as a reminder that downside surprises to activity or inflation data will be hard to tolerate given their low starting points.
We retain a final 25bps cut in our profile, and currently have May penciled in.
Annette Beacher, TD Securities
The policy statement was marginally more upbeat than December, especially on the global backdrop.
The Board’s reference to the exchange rate depreciation since 2013 is a regular feature in Bank rhetoric, as is “an appreciating exchange rate could complicate this adjustment”. We see the RBA being comfortable with the exchange rate at current levels.
As long as the ECB tapers, China continues to expand without sparking a financial market shock, and the U.S. hikes at least twice again this year, we expect the RBA to lift the cash rate in November, or at least spell out a strong case for tightening.
More to follow…