- The RBA kept interest rates unchanged at 1.5% for a 18th consecutive meeting in April.
- Trade tensions and higher short-term funding costs for lenders featured heavily in the bank’s deliberations in April.
- Many economists suspect the RBA may need to hold interest rates lower for longer.
The Reserve Bank of Australia’s (RBA) kept interest rates steady at its April monetary policy meeting, extending the streak without a move in either direction to a record-breaking 20 months.
And that trend looks set to continue for some time yet with the bank providing little indication that it intends to adjust rates in the final paragraph of the April statement statement, retaining an undisputed neutral bias.
While that outcome was widely expected by financial markets, there were some notable tweaks in the April statement that immediately caught the eye, suggesting that, on balance, there’s now even less need for the RBA to consider a lifting rates.
Now that they’ve had time to analyse the statement, it’s time to see what economists have made of the RBA’s latest offering.
Let’s find out, starting with Su-Lin Ong from RBC Capital Markets.
Su-Lin Ong, RBC Capital Markets
There were several new additions to today’s short statement.
Firstly, the RBA acknowledged the rise in funding costs in the US and a number of other countries including Australia. This has been the main development since the board last met and is likely to have been discussed in detail at today’s board meeting.
Secondly, with trade tensions front and centre, the RBA also had little choice but to acknowledge some “concerns about the direction of international trade policy in the United States.” Interestingly, it dropped a reference to stronger growth in Asia in 2017 “partly supported by increased international trade.”
Thirdly, while it remains upbeat on the domestic labour market the addition of the sentence that “the unemployment rate…has been steady at around 5.5% over the past six months” is an acknowledgement that the pace of employment generation remains insufficient to absorb the considerable labour market slack needed for wages growth to pick up more convincingly on a sustained basis. The RBA’s downwardly revised unemployment rate forecasts from its February SoMP may be slightly on the optimistic side.
Persistence in elevated funding levels and/or escalation in trade measures will likely see the RBA on hold for longer. We suspect both issues will dominate in the near-term given the lack of other key developments domestically. Bubbling away in the background, however, is the moderation in the Australia labour market indicators which, should they persist, add to the emerging risks for the economy from higher funding costs and increased global trade tension.
All up, we take today’s statement as cautionary in tone and consistent with our base case for the RBA to stay on hold throughout 2018.
Sally Auld, JP Morgan
While the RBA has softened its commentary around 2018 growth in recent months, it is still sticking to its forecast of a gradual decline in the unemployment rate and a gradual pick up in wages and inflation. While this remains the case, the market will persist with pricing a gentle upward slope to the OIS curve.
This week’s partial data — retail sales, trade balance and building approvals — will provide further information on how Q1 growth is tracking.
As it stands, the central bank needs growth to average a touch over 0.8% per quarter in the first half of the year to be confident that its 2018 growth forecasts are on track. This will require both consumption to hold in and net exports to improve. We have confidence in the latter dynamic, but are less convinced on the former.
Accordingly, we see scope for the RBA to re-assess its 2018 and 2019 growth forecasts in coming quarters.
Ivan Colhoun, National Australia Bank
The main developments in the past month were market related with the Bank noting increased equity market volatility due to “concerns about the direction of international trade policy in the US”, slightly wider credit spreads and “some tightening of conditions in US dollar short-term money markets” for reasons other than the increase in the Federal funds rate.
The latter has flowed through to higher short-term interest rates in a few other countries, including Australia. If Australian intermediaries were to raise lending rates as a result, this would likely mean a rise in official interest rates would be further away than otherwise. So far, there have been a number of 5-10 basis point increases by a few smaller institutions. Much will depend upon whether the funding situation persists, reverses or worsens.
It doesn’t sound like anything happening any time soon [on interest rates].
Watch points are possible income tax cuts by both sides of politics, US dollar funding costs and the flow-through to Australia, whether the government can get its company tax cuts through in the May budget and, above all, the outlook for Australian wage growth.
David Plank, ANZ Bank
The substantive changes to the RBA’s post meeting statement focus on the increased volatility in financial markets.
In particular, the RBA notes that “equity market volatility has increased from …very low levels…partly because of concerns about the direction of international trade policy in the United States. Credit spreads have also widened a little, but remain low.” The Bank goes on to say that the “tightening of conditions in US dollar short-term money markets [over and above that due to Fed tightening]…has flowed through to higher short-term interest rates in a few other countries, including Australia.”
The domestic part of the statement is largely unchanged, with the growth outlook still upbeat, but the flow through into wages and prices is expected to be slow. The reference to the impact of an appreciating exchange rate is precisely the same as last month.
We are loath to read too much into the RBA’s focus on global financial market volatility, at this stage. Still, if the rise in short-term rates were to continue and extend into meaningful increases in retail interest rates, there might be some policy implications.
John Peters, Commonwealth Bank
With inflation and wages outlook remaining still very benign, in the context of the continuing “source of uncertainty regarding the outlook for household consumption” along with more and evidence of a moderating house activity and prices, it looks like the RBA will be sidelined for quite a few months yet.
We expect the RBA to leave the cash rate at 1.5% until November 2018.
The key risk to this view is that the RBA will wait a bit longer before moving given the absence of any intensifying wage or price pressures to date and widespread evidence of moderating house prices. Current market pricing has the first rate rise fully priced in around June 2019.
Paul Dales, Capital Economics
The RBA’s comment in the policy statement that “equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the US” comes on the back of concerns highlighted in the minutes of March’s RBA policy meeting that a rise in trade protection would hurt Australia. Promoting this issue from the minutes to the policy statement shows that it is rapidly rising up the RBA’s lists of possible risks.
The RBA also drew attention to the “tightening of conditions in US dollar short-term money markets…for reasons other than the increase in the federal funds rate” that “has flowed through to higher short-term interest rates in a few other countries, including Australia.” In other words, events in the US have led to a spike in the short-term funding costs for Australian banks. This has already led some smaller banks to raise their mortgage rates. As the big four banks don’t use as much short-term funding and as they are receiving a lot of heat from the Royal Commission, they are less likely to follow suit. Even so, this global tightening in lending conditions further reduces the need for the RBA to raise official rates.
This comes on top of the domestic issues that already mean that the RBA will probably keep interest rates at 1.5% for longer than most analysts and the financial markets expect. Our view is that the weak housing market and low wage growth will prevent GDP growth from accelerating from 2.3% last year to 3.0% as the RBA is hoping and will keep underlying inflation below 2.0%.
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