RBA leaves rates unchanged, flags pick-up in economic growth

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The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5% at the conclusion its February monetary policy meeting, an outcome that was widely expected by markets and economists alike.

In the accompanying monetary policy statement, the bank gave no indication that interest rates were likely to change in the foreseeable future, delivering a neutral bias at the conclusion of the statement.

“Taking account of the available information, and having eased monetary policy in 2016, 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,” it said.

Following Australia’s shock 0.5% GDP contraction in the September quarter last year, something that arrived the day after the board last met in December, it said that it “largely reflected temporary factors”, flagging the likelihood that growth would return in the period ahead.

“A return to reasonable growth is expected in the December quarter,” it said. “The Bank’s central scenario remains for economic growth to be around 3% over the next couple of years.”

Fueling this belief, it said that growth would be helped by further increases in resource exports, less drag from declining mining investment, a pick-up in consumption and in non-mining business investment.

“Consumption growth is expected to pick up from recent outcomes, but to remain moderate”, it said, adding that “some further pick-up in non-mining business investment is also expected”.

From an income perspective, it said the improvement in the global economy had contributed to higher commodity prices “which are providing a boost to Australia’s national income”.

The positive view communicated towards the domestic economy was also reflected in the bank’s view on the global economy with the board acknowledging that conditions had “improved over recent months”.

“Above-trend growth is expected in a number of advanced economies, although uncertainties remain,” it said.

On China, the most important trading partner for Australia, it said that “growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction”.

However, it did raise some concerns about the factors underpinning the recovery, noting the “composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain”.

It’s a fairly optimistic, albeit cautious, assessment from the board, and suggests that it sees no need to add to policy stimulus in the period ahead.

Feeding that belief, it said that the economic outlook continues to be supported by the low level of interest rates. It also flagged no concern about recent strength in the Australian dollar, repeating the view of recent months that “an appreciating exchange rate would complicate” Australia’s economic transition.

On the labour market, it said that labour market indicators were “mixed” with “considerable variation in employment outcomes across the country”. However, it yet again struck an optimistic tone, noting that while the unemployment rate had “moved a little higher recently” it was accompanied by an improvement in full-time employment growth.

On another key area for policy consideration — the inflation outlook — it said that the most recent consumer price inflation (CPI) figure, released two week’s ago, was “as expected” with both “headline and underlying inflation of around 1.5%”.

Crucially, it said that its inflation forecasts were “largely unchanged”, a consideration for markets four days ahead of the banks quarterly statement on monetary policy.

“The continuing subdued growth in labour costs means that inflation is expected to remain low for some time,” it said. “Headline inflation is expected to pick up over the course of 2017 to be above 2%, with the rise in underlying inflation expected to be a bit more gradual.”

Again, sentiment that suggests the RBA is in no rush to lower rates again.

After some rapid house price growth in Sydney and Melbourne over the past year, seeing national capital city house price grow at the fastest pace since 2009, it said that conditions in the housing market varied considerably around the country.

“In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining,” it said.

On the recent pick-up in investor activity in Australia’s eastern states, it said “borrowing for housing has picked up a little, with stronger demand by investors”.

“With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments,” it said.

There was no specific mention that tighter macroprudential measures from Australia’s banking regulator, APRA, were being considered at this point.

Given the optimistic tone seen throughout the February statement, it seems that the RBA board is more than content with where the Australian economy sits at present. Domestic growth is expected to return and inflation pick-gradually, thanks in part to strengthening in the global economy.

It doesn’t sound that the RBA needs to do much at all.

Financial markets certainly agree, pushing the Australian dollar higher in response to the policy statement.

Cash rate futures have also softened in response to the release, not only scaling back expectations for near-term rate cuts but also increasing the likelihood that rates will rise by the end of this year.

A 25 basis point rate hike is now deemed to be a 14% probability based off current pricing.

The full February monetary policy statement from RBA governor Philip Lowe can be accessed here.

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