The Reserve Bank of Australia’s (RBA) eleventh and final monetary policy meeting of 2016 was likely an uneventful one.
It left interest rates on hold at 1.5%, an outcome almost everyone was expecting.
And there were only few minor changes in the accompanying monetary policy statement, although the board did flag the prospect of a near-term slowdown in economic growth, noting that “some slowing in the year-ended growth rate is likely, before it picks up again”.
That’s likely in reference to Wednesday’s Q3 GDP report, something many economists believe will show the Australian economy contracted for only the fourth time in the last 25 years in the September quarter.
However, it acknowledged that the economy is continuing its transition following the mining investment boom.
Outside of alluding to a near-term slowdown in the economy, the board’s language on the outlook for inflation and the labour market was similar to that conveyed in November, although there were a few noticeable tweaks made to its view on the housing market.
On inflation, it said that it “remains quite low”, adding that weak growth in labour costs is expected to see it “remain low for some time, before returning to more normal levels”.
While similar to the language used in November, the board dropped its reference to “very low cost pressures elsewhere in the world”, suggesting that the global “outlook for inflation is more balanced than it has been for some time”.
On the labour market, an area of particular focus given weak wage and employment growth and elevated levels of underemployment, the board said recent indicators “continue to be somewhat mixed”.
“The unemployment rate has declined this year, although some measures of labour underutilisation are little changed,” it said, acknowledging that “there continues to be considerable variation in employment outcomes across the country”.
It also noted the recent divergence between part-time and full-time hiring, stating that “part-time employment has been growing strongly, but employment growth overall has slowed”.
It said that employment is likely to continue expanding in the near-term.
On the final major area for policy consideration — the housing market — the board said had “strengthened”, a new line compared to the November policy statement, and one that hints that the bar to further rate cuts is moving higher.
“In some markets, prices are rising briskly, while in others they are declining,” it said.
Despite turnover in established dwellings being lower than a year earlier, it also noted that “housing credit has picked up a little”.
As was the case in November, and despite some weakness in recent dwelling approvals and new home sales data, it said that a “considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities”.
Outside of those three key pillars for policy consideration, the board touched on the recent lift in global bond yields in the wake of Donald Trump’s victory in the US presidential election, noting that while they had risen, the adjustment had been “orderly”.
It also said that while funding costs for some borrowers had also moved higher, they still remained low. The board also suggested that global monetary policy settings remained “remarkably accommodative”.
Elsewhere, and perhaps reflective of the need to look through expected weakness in Wednesday’s GDP report, it said that “higher commodity prices have supported a rise in Australia’s terms of trade…. providing a boost to national income”.
With prior interest rate cuts and weakness in the Australian dollar assisting the economy to rebalance, the board retained a neutral rates bias in the final paragraph of the statement.
“Taking account of the available information, and having eased monetary policy earlier in the year, 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.
That, taken with the tone of December statement, suggests the board has no desire to adjust policy settings in the near-term.
Financial markets certainly think that’s the case with cash rate futures putting the odds of a further 25 basis point rate cut in February 2017 — when the RBA next meets — at just 13%.
Looking ahead, and excluding external developments, incoming data on the labour and housing markets, along with the inflation outlook, will likely determine whether the next move in interest rates will be higher or lower.
Here’s the full monetary policy statement released by RBA governor Philip Lowe.