The Reserve Bank of Australia (RBA) has just delivered its latest assessment on how it sees the global and Australian economies, releasing its June monetary statement this afternoon.
In one word it is “optimistic”, retaining a glass-half-full view on what it’s seeing at present, delivering a a largely upbeat assessment on the outlook for the Australian economy, particularly in relation to the business sector, along with the labour market.
It even flagged a moderation in housing market conditions, an area it was scrutinising heavily given a perceived increase in financial stability risks.
While there were some exceptions, the overwhelming tone throughout the statement was one of guarded confidence
The degree of optimism throughout the statement has, in itself, created the main talking point among markets, particularly at a time when Australian economy is expected to have slowed sharply in the first three months of the year.
Investors have embraced the RBA’s upbeat overtones, driving the Australian dollar higher and selling down Australian interest rate futures — a reaction one would expect if they were feeling more confident.
While they are keeping the faith, it’s time to see what Australia’s economic community have made of the statement.
Is the RBA right to be optimistic, or is its optimism misplaced, and prone for disappointment?
Let’s find out, starting with Su-Lin Ong of RBC Capital Markets.
Su-Lin Ong, RBC Capital Markets
Barely a month out from its most recent detailed update including key macro forecasts which was both upbeat and confident, it was unlikely that today’s statement was going to convey a significantly different message. Indeed, the RBA suggests that “economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.” Some of the shift in language, however, hints at a little less confidence and gives the RBA some wriggle room to lower its GDP/inflation forecasts should data in the coming months continue to disappoint.
H1 growth is shaping up on the weak side even if it is partly weather affected in Q2 and suggests that the RBA’s base case of a return to 3%+ growth and accompanying within target inflation remains decidedly optimistic. We continue to think that the risk is for a final 25bp cut in Q4.
Gareth Aird, Commonwealth Bank
The immediate focus for local financial market participants turns to tomorrow’s national accounts. We think that Q1 GDP growth is going to be a weak 0.1% versus the RBA forecasts for a 0.7% lift. Annual growth is likely to slump to its slowest pace since Q3 2009.
Growth outcomes in line with our numbers would normally bring a rate cut back into the fray. But in our view, policy easing is off table unless the housing market falters or the unemployment rate materially rises. This means that we think that the inflation prints over 2017 will take a back seat to developments in the labour and housing markets. As such, our monetary policy call has the RBA on hold in 2017 and well into 2018.
The risk, however, lies with another cut given weak wages growth, below target core inflation and an expected continued downturn in hard commodity prices. In that context, the market is rightly pricing in a non trivial 1 in 5 chance that the cash rate is cut again.
Matthew Hassan, Westpac
While there is always room for speculation, most of the changes this month seem to be acknowledging developments rather than marking a shift in the Bank’s core thinking. Certainly there is no explicit policy bias being expressed and the Bank seems to have gone out of its way to reaffirm its “growth gradually increasing to a little above 3 per cent” view.
The structure of the statement is also worth noting. The most important concluding paragraph is completely unchanged, stating policy was unchanged and giving no forward guidance. The penultimate paragraph discusses housing market conditions, a key area of concern for the Bank according to its most recent minutes, and the focus of its latest macro-prudential policy measures. Other discussion points are given less prominence.
All up, we see no reason to change our current view that the official cash rate will remain on hold throughout 2017 and 2018.
David Plank, ANZ
On balance, we continue to see the RBA on hold for the foreseeable future. We do, however, think the Bank is underplaying the likely weakness in economic activity in the first half of 2017. We think there are good reasons to believe that the pace of economic growth may have stepped down in a sustained fashion. If this is the case then it will be difficult for core inflation to accelerate markedly from its current level. In which case, the Bank’s policy settings may be challenged.
Paul Brennan, Citibank
The statement is similar to last month, with little hint of any change to the policy rate in the near future. The Governor repeated his previous, very broad guidance that the current stance of policy was consistent with sustainable economic growth and achieving the inflation target over time. We continue to expect no change in the cash rate this year.
We are more cautious than the RBA about the likely continuation of strong business conditions given the coming downturn in housing, the sluggish consumer and subdued business investment.
Sally Auld, JP Morgan
Another RBA meeting passes with no reference to what most perceive to be shifting risks to the growth and inflation outlook. Nor was there any change to the guidance this month, and as long as the RBA can attribute quarter-to-quarter volatility in GDP outcomes to unusual weather, RBA neutrality is likely to persist for sometime yet.
Tapas Strickland, NAB
Today’s statement did not add anything new to the messaging from the RBA. It has indicated it will ignore the likely weakness in Q1 GDP. It is holding the faith that economic growth will pick up to an above trend 3% pace over the next couple of years and this should help inflation increase gradually. The final paragraph was unchanged implying that unless something substantial changes, the RBA expects to keep rates on hold for some time.
Last month’s bumper jobs figures should help alleviate concerns the RBA had over the labour market in the short term, but this will be an important area to watch. NAB sees the RBA on hold in 2017 and 2018.
Scott Haslem, UBS
Overall, the RBA stayed broadly ‘neutral’. It remains comfortable with its view that an improving global backdrop will lead to better domestic growth. So despite a likely miss for Q1 GDP, and some signs of slowing housing, the RBA stuck to its bullish 3% plus outlook. Overall, we continue to expect the RBA to stay on hold ahead, and assess the impact of recent macroprudential policy tightening.
Stephen Walters, Australian Institute of Company Directors
The RBA’s decision to leave the cash rate steady today is uncontroversial, but might take more explaining tomorrow if the GDP report shows the economy having contracted in Q1, as some economists now forecast, following the weak trade data released earlier today. Board members will not have had a preview of the data during their gathering today but, like the rest of us, will have had a pretty good idea that GDP growth will have been weak, possibly even negative.
The RBA looked through the fall in real GDP revealed six months ago, and probably will do so again, knowing that GDP data is rooted firmly in the past. Indeed, more green shoots of economic recovery have emerged since the end of Q1, including higher levels of business confidence and a small lift in investment. The RBA will remain alert to downside risks, but the lingering excesses in housing, even if they have eased a touch, will continue to make it difficult for the RBA to lower the cash rate again any time soon.
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