JP Morgan explains why the RBA won't turn hawkish like other central banks

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The European Central Bank, Bank of England and Bank of Canada have all been making hawkish statements in recent weeks, seemingly laying the platform for a reversal of emergency policy settings in the months ahead.

It’s got a few people wondering whether the Reserve Bank of Australia (RBA) will be next, potentially as soon as the bank’s July monetary policy meeting on Tuesday next week.

While that’s a possibility, not everyone thinks the RBA will join their compatriots in Europe and Canada in signalling that tighter monetary policy is on the way.

Sally Auld, chief economist at JP Morgan, is one who thinks the RBA is unlikely to change its tune, suggesting there are two key factors that will prevent a shift in rhetoric.

She explains:

In Australia, it’s hard to see what has changed of late such that the RBA needs to shift to a more hawkish stance. Australia still has inflation that is below its 10-year average and the unemployment rate is above its 10-year average, and this sets it apart from the economies in which central banks have started to sound more hawkish. There has been better news on the labour market of late, but the RBA have been forecasting that realised labour force outcomes would realign with forward indicators, so it seems fair to assume that recent developments are not unexpected. Recent GDP data were softer than forecast, and although the RBA will be biased to look through this, it is nonetheless hard to ignore worrying signs around the consumption trajectory due to softer consumption growth and a falling savings rate.

Here’s how Australia ranks to other major developed nations in terms of unemployment and inflation compared to the average seen over the past decade.

Source: JP Morgan

Unemployment is higher and inflation lower than what has been the case in the past, which puts Australia at odds from other nations at present.

As such, Auld thinks the RBA’s message will be much the same.

“We don’t think enough has changed such that the RBA would perceive a notable shift in the distribution of risks around its growth or inflation forecasts,” she says.

“Next week’s statement will likely acknowledge better labour market outcomes, but we don’t expect any change to the narrative on inflation, wages nor housing.”

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