The RBA March interest rate decision has now come and gone, and to little fanfare.
It did exactly what everyone expected: left the cash rate unchanged at 1.5% and delivered a cautiously optimistic monetary policy statement.
It was seemingly a rinse and repeat of what was previous communicated by the bank and governor Philip Lowe on several occasions over the past month, although there were a few noticeable exceptions in relation to the housing and labour markets.
While there’s been little market reaction to the policy statement, suggesting that investors haven’t found anything to get overly excited about, it’s time to see what Australia’s economic community has made of it all.
They’re all seasoned RBA-watchers, so if there is a talking point, they’ll be sure to uncover it.
Here they are, starting with Westpac’s Bill Evans.
Bill Evans, Westpac
There were a number of changes in the statement from the statement in February, some positive and some less so.
Firstly, he made the following comment: “Most measures of business and consumer confidence are at or above average”. He also gave us the closest we have seen to an official forecast on US monetary policy where he noted: “Interest rates are expected to increase further in the United States”. That probably implies that he expects a March rate hike from the Fed, in line with our own thinking.
On the less encouraging side, he refers to the insipid growth in household incomes and linked to that effect the observation that employment growth has been concentrated in part time jobs. Those considerable headwinds for the economy have been known for some time but, recently, he has not chosen to highlight them. As we saw in the December quarter national accounts, the stronger consumption came at a cost of a lower flow into savings with the savings rate plummeting.
The commentary around the housing market was shorter than in February despite our warnings that further macroprudential policies may be being considered. The Governor’s statement was restricted to “supervisory measures have contributed to some strengthening of lending standards”.
We do not expect that the Australian economy will be sufficiently robust in 2018 to justify a return to a tightening cycle and continue to forecast rates on hold in 2017 and 2018.
Su-Lin Ong, RBC Capital Markets
While the wording is largely unchanged we think the commentary around the labour market, wages and inflation should not be overlooked. They continue to capture a sense of uncertainty over labour market outcomes and the composition of job creation which is intertwined with weaker than expected wages growth and a slight nudging down of the RBA’s core inflation forecasts over the medium term. With the wage/ unit labour cost dynamics likely, in part, to capture a structural element and need for Australia to be more competitive, the risk is for sub-target core inflation to persist for longer than expected.
Given the global backdrop, increased focus on financial stability and a relatively stable unemployment rate, the odds are that the RBA will tolerate sub target inflation for a bit longer. Always a balancing act, it is clear which factors are dominating policy deliberations at this juncture.
This challenges our base case for a final 25bp cut in Q2. However, the risk of further easing remains, especially when the housing construction cycle turns, the most recent tightening in lending standards/ lift in rates tempers lending, and domestic demand stays tepid as we expect. It may be harder for the RBA under those circumstances to ignore a persistent undershoot of its inflation target.
Shane Oliver, AMP Capital
The RBA remains more confident regarding global growth, sees Australian economic growth as okay, regards the labour market as being mixed, sees a gradual rise in underlying inflation and continues to see conditions in the housing market as varying considerably across the country.
As a result, it remains comfortably on hold regarding interest rates. As noted last week we now expect the RBA to leave rates on hold for the rest of the year. Another rate cut is still possible but it would require another leg down in underlying inflation. That said if the RBA is to do anything on rates this year a cut is more likely than a hike. A rate hike is unlikely until later next year.
One area where the RBA may be signalling something a bit more interesting though is in relation to the housing market where in the February post meeting Statement it noted that “supervisory measure have strengthened lending standards” to now saying that “supervisory measures have contributed to some strengthening of lending standards” which suggests that the RBA thinks a further tightening in lending standards in relation to lending for housing may be required.
Its possibly a sign that more macro prudential measures to slow property market investment may be on the way. This could take the form of lowering the threshold for banks’ growing total lending to property investors to say 7% year on year from 10% currently. The RBA’s comments around lending standards are also consistent with recently expressed concerns by the RBA regarding household debt.
Ivan Colhoun, NAB
The RBA Governor has made clear in recent public pronouncements that while the Bank would like to see the unemployment rate come down more quickly and inflation return to target more quickly, the Bank is concerned that a further cut in interest rates could induce some households to borrow beyond their means. The Bank is thus prioritising its concerns about household balance sheets at this point. The Governor has also noted that if the unemployment rate were to begin to rise, then the Bank could reassess the question about the time taken to return to the inflation target.
It’s likely that the RBA will leave interest rates unchanged at least for the next six months. NAB’s forecasts for economic growth in 2018 are weaker than those of the RBA, largely because we expect a drag from lower commodity prices and a downturn in the housing construction cycle. This could see the RBA again considering a further cut to interest rates late this year.
Scott Haslem, UBS
Today’s statement reveals a central bank pleased with both the improving global backdrop and the transition of the Australian economy to better growth and stronger employment post the mining capex boom.
As we’ve noted on numerous occasions, this continues to suggest the hurdle for further rate cuts this cycle is high. However, the RBA is also comforted by the fact that inflation remains “quite low” and this points to little near term urgency to back away from record low cash rates.
However, there is little doubt the recent re-acceleration in housing lending and prices raises the risk the current record low cash rate — arrived at during a prior deflationary environment — might now just be too low.
In their discussion of housing, the RBA has removed last month’s assessment that “borrowing for housing has picked up a little”, replacing this with the stronger statement that “borrowing for housing by investors has picked-up”, while also removing last month’s comment that “some lenders are taking a more cautious attitude to lending”.
This raises the possibility of more macro-prudential policy in the future.
Kristina Clifton, CBA
Today’s RBA commentary confirms our view that the cash rate will remain on hold in 2017. There is little in the way of wage and inflationary pressures and underlying inflation is expected to remain below target until end 2018. However over the past few months Governor Lowe has expressed some discomfort with the prospect of household debt rising further. He has also acknowledged that conditions are strong in the housing markets in Sydney and Melbourne. These factors mean the cash rate is unlikely to move any lower.
We expect that cash rate to remain at 1.5% throughout 2017.
David Plank, ANZ
There were only a few changes of note in the RBA’s statement, mostly with regard to housing. This is of little surprise just one month after the February forecast update. Having said this we do think there have been some substantive developments over the past month, most notably: continued improvement in the global economy; a decent rebound in the Australian economy in Q4; further weakness in wages despite this recovery; and an acceleration in house price inflation in Sydney and Melbourne.
How these developments impact the RBA’s outlook will depend significantly on the Q1 CPI outcome due in late April, in our view. It is not inconceivable that the Bank is faced with a softer inflation environment even as it maintains its bullish view on activity. Given the state of the housing market this will present a major policy challenge. Of course, we still have some way to go before we get to this point.
We continue to see rates on hold at 1.5% for an extended period, with the RBA’s outlook for gradually rising inflation potentially challenged by soft wage growth.
Stephen Walters, Australian Institute of Company Directors
Today’s statement announcing the decision was a virtual “copy and paste” from a month ago, with only a few tweaks here and there.
Officials made no specific mention of the stellar headline GDP result revealed last week, nor of the underwhelming business investment report from the week before. The discussion on housing sounded familiar, with a repeated acknowledgement that house prices are rising “briskly” in some markets, but falling elsewhere. Similarly, there remain big regional differences in labour market conditions, as before.
In summary, judging by the tone of today’s statement, RBA officials are pretty content with the current stance of policy, which they believe “would be consistent with sustainable growth in the economy and achieving the inflation target over time”. This non-committal guidance at the end of the statement was very similar to that of a month ago, except that the Bank removed the previous reference to the easing of monetary policy in 2016, presumably because those rate cuts are receding into the rear view mirror.
In terms of what happens from here, pricing in financial markets now implies that it is all but certain the cash rate will be higher by the middle of next year, although a small number of market economists still expect a rate cut in the interim. Even easier policy, though, would require something to have gone seriously wrong with the economy.
It seems more likely that the next move from the RBA will be a rate hike, albeit not until 2018.
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