Following the lead of his predecessor, Glenn Stevens, in his first meeting in charge, Philip Lowe produced few surprises in his first monetary policy meeting as RBA governor, leaving interest rate unchanged at 1.50% today.
While the rates decision was as close to certain as one could get, several tweaks made to the accompanying policy statement caught the eye, none so more than the absence of a conditional easing bias in the final paragraph, something that in the past has been used to signal that a further reduction in interest rates was likely.
We’ve had our say as to what could see the RBA cut interest rates further, citing upcoming inflation, retail sales, housing and labour market data, along with policy decisions from the US Federal Reserve, as key factors that could see the cash rate reduced even further.
Now it’s time to see what Australia’s economic community has made of the October policy statement. Has it snuffed out the possibility of another rate cut arriving in the months ahead or have the changes found within it — particularly towards the outlook for household consumption and labour market conditions — bolstered the chance of another rate cut being delivered, perhaps as soon as November?
We start with Bill Evans, chief economist at Westpac.
Bill Evans, Westpac
We were most interested in the concluding paragraph of the Governor’s statement. Note that in July this year the Governor changed June’s neutral bias to an easing bias adopting the terms “over the period ahead further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”. That statement in July emphasised the importance of the upcoming inflation report for the August policy decision. There was always a risk that a similar approach could be taken this time although it was not our expected outcome.
In the event the closing paragraph was the same as in September: “Taking account the available information … the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. That means that a very clear neutral bias has been retained.
The decision to de-link the next inflation report from next month’s policy decision must be partly influenced by developments in the housing market. Recent data released by CoreLogic shows dwelling prices in Sydney up 3.5% in the last three months and by 5% in Melbourne. That development is hardly consistent with the comment in September that “the best available information suggests that dwelling prices overall have risen moderately over the past year”. That sentence has been replaced with: “The rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently”.
Other comments on the overall economy are largely unchanged with the exception of an additional remark around household consumption which “appears to have slowed a little recently”. Other consistent observations are: “labour market indicators have been somewhat mixed”; “inflation remains quite low”; and “the economy is continuing to grow at a moderate rate”.
Since the move in August the only real candidate for another move was going to be November when fresh information on inflation would be available and the Bank would have the opportunity to justify any move with its revised forecasts.
We are not expecting to see any significant revisions to the growth forecasts and our forecast for underlying inflation in the September quarter also points to no significant change in the outlook for inflation. Consequently we see prospects for a rate cut at the November Board meeting being remote.
Michael Blythe, CBA
The RBA’s language around the economy could be seen as a touch more cautious. So while GDP growth is running above potential, the RBA describes growth as “moderate”. There is a new concern that consumer spending has slowed a little. The standard line about a higher AUD complicating the economic adjustment remains.
The standout change is the length of commentary relating to the housing market. RBA arguments about a cooling market have been challenged by the data in recent months. Today’s commentary and its length does sound a little strident. But the RBA needs to be convinced that the housing market would be insulated from any further interest rate changes before delivering another cut.
We have a further 25bpt cut penciled in for November in our forecasts. This timing is still a popular choice among economic commentators. But some are now saying that the RBA is done and market pricing has moved away from November. The market puts only a 23% chance of a move.
Our sense for a while now is that the RBA is a reluctant rate cutter. And many recent developments are likely to have reinforced that reluctance. GDP growth is running above potential and the unemployment rate is slowly trending lower. It is hard to argue that the domestic economy needs additional assistance. The AUD is higher. But so are commodity prices. There is a debate about whether a further rate cut would help, or perhaps threaten financial stability. So much will depend on the Q3 CPI reading due on 26 October.
George Tharenou, Scott Haslem and Jim Xu, UBS
Overall, the RBA statement was again ‘near-neutral’, with only a ‘weak easing bias’. Specifically, the RBA’s final paragraph was identical saying “that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
For Australia, the RBA reverted to the view a couple of months ago that “the economy is continuing to grow at a moderate rate”. That said, the RBA chose not to emphasise the materially better capex outlook and stronger than expected housing data.
Indeed, on housing, they again downplayed concerns, arguing again that “supervisory measures have strengthened lending standards”, and “the rate of increase in housing prices is lower than it was a year ago”, but conceded “some markets have strengthened recently”. The RBA repeated “Considerable supply of apartments is scheduled to come on stream”, but now added the implication that “Growth in rents is the slowest for some decades.”
There were only minor tweaks to the RBA’s post-meeting statement today. That said, we view it as still on the ‘positive’/’near-neutral’ side. Hence, given that Lowe’s recent comments suggest a hawkish tilt regarding the medium-term nature of the inflation target and the elevation of the importance of financial stability, looking forward we still expect the RBA to hold rates steady.
David de Garis, NAB
The final paragraph was unchanged and importantly contained no explicit easing bias with no hint that the upcoming Q3 CPI is weighing on the minds of the Board – that’s suggestive of a broadly unchanged rates outlook for the remainder of this year.
The language on the Australian economy was amended, but only at the margin; softer tones describing the labour market and household consumption were balanced against more positive tones on commodity prices, GDP growth and some housing markets.
They did offer a less upbeat view on household consumption that “appears to have slowed a little recently”, even though “household and business sentiment remain above average”. Descriptions around the labour market also continue on the soft side but continue to note that forward indicators point to expansion in employment in the near-term.
On housing, the Bank did today recognise that while “the rate of increase in housing prices is lower than it was a year ago”, there were “some markets have strengthened recently”. Despite that, it appears the RBA remains reasonably content that risks with the housing market have and will continue to abate over time.
They again stated that while “low interest rates have been supporting domestic demand”, on the lower exchange rate today’srelease noted it “has been helping” the traded sector as opposed to “is helping” used after the September Board meeting. A nuance perhaps but one where they are open to the view that the benefit of the exchange rate to the economy might now be waning. If so, the Bank would then be potentially less openly tolerant to further AUD net appreciation should the economy or inflation surprise on the low side.
The next big local data point that could yet make the upcoming November meeting a “live” meeting is the September quarter CPI, being released on 26 October. NAB’s model forecast is for steady underlying inflation of 0.5% q/q that would see the RBA continue to hold rates steady through the New Year.
Felicity Emmett, ANZ
We continue to think that rates are on hold, but the RBA retains an easing bias.
The forward guidance in today’s statement suggests to us that monetary policy is on hold for the time being as the Bank gauges the impact of the rate cuts in May and August. We think the RBA’s easing bias was evident in Governor Lowe’s recent parliamentary testimony when he noted that “certainly there are scenarios where rates would fall again and there are scenarios where they would not need to fall again”.
We think that this easing bias is underpinned by the Bank’s forecasts, which have underlying inflation remaining well below the 2.5% midpoint of the target band for an extended period as well as the recent sustained fall in inflation expectations.
The key things to watch for policy are the Q3 inflation report due later this month, as well as housing and labour market data. Housing market data have assumed more importance given the recent change to the RBA’s statement on the conduct of monetary policy to take more explicit account of financial stability.
As Governor Lowe noted in his testimony, “recently, for example, we have considered that a very quick return of inflation to the two to three per cent range, at the cost of a material deterioration in the health of private sector balance sheets, is unlikely to be in the public interest, so the revised drafting recognises that the inflation target is pursued in the context of the bank’s broader objectives, including financial stability. That is the monetary policy framework”.
The trajectory of the labour market and the exchange rate also matter to the RBA, while a material surprise in the Q3 inflation report due later this month would be significant.
Shane Oliver, AMP Capital
Two areas where there were more substantial changes in commentary were in relation to the labour market and the housing market. In terms of the labour market the RBA has highlighted significant variation across the country in jobs growth and the divergence between part time and full time employment but seems reasonably relaxed about the employment outlook.
On the housing market the RBA remains relatively sanguine but has acknowledged a strengthening in some markets recently (presumably Sydney and Melbourne), suggesting that it may be becoming a bit less relaxed. The RBA seems to remain comfortable in waiting for the surge in apartment supply to cool property prices. Given the recent rebound in auction clearance rates, Sydney and Melbourne property prices continuing to growth solidly after huge gains over the last four years (60% in Sydney, 40% in Melbourne) and the risk that the apartment building boom will go way beyond the point of being healthy, my view remains that the RBA is a bit too relaxed about home prices and at least a bit of “jawboning” would be appropriate at present.
The fact that the RBA did not repeat its July meeting reference to upcoming inflation data – with September quarter inflation data due later this month – suggests that unlike in July its bias on interest rates is neutral.
However, 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 near term risks to inflation are on the downside thanks to competitive 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, commodity prices and national income looking like it has bottomed and the new Governor perhaps preferring a period of stability, this is a close call and is critically dependent on seeing a lower than expected September quarter inflation result.
Either way a cut in the cash rate to 1% or below and the adoption of quantitative easing remains very unlikely in Australia.
Su-Lin Ong, RBC
Several changes to the statement caught our attention. Firstly, the opening paragraph was more downbeat on the global economy including China. The addition of the final sentence in this paragraph – “Inflation remains below most central banks’ targets” – was noteworthy.
Secondly, the reference to some moderation in household consumption was new, as was the observation about household and business sentiment. We have long held below trend household consumption forecasts in our profile highlighting numerous challenges including tepid wages growth, high levels of household debt, and a patchy labour market. Recent data suggest that some of these factors may be starting to weigh on households.
Thirdly, the changes to the labour market discussion highlighted the variation in employment across the nation and dominance of part time jobs.
These three changes delivered a slightly more cautious tone to Governor Lowe’s first statement. This was partly offset by an acknowledgement that house prices have strengthened recently with a reference to moderate growth dropped.
At this juncture, we suspect that the housing dynamics (construction, prices, lending) may be a more important factor in policy deliberation than others, especially given the increased reference from Dr Lowe to the importance of financial stability early in his tenure.
The key concluding paragraph was unchanged with no reference to the upcoming CPI which suggests to us that the cash rate is likely to head into 2017 at 1.50% unless Q3 CPI prints well below 0.4%.
The discussion today around some of the forward looking indicators, including housing, is consistent with an easing bias and risk of further cuts at some stage. The reference to slowing consumption at a time when the residential construction upswing is in overdrive and house prices are rising bodes poorly for consumers when this sector eventually moderates, and the global discussion highlights ongoing uncertainty.
We remain comfortable with our base case that cash will end 2016 at 1.50% and 2017 at 1.25%.