The Reserve Bank of Australia (RBA) delivered few surprises at its November policy meeting, keeping interest rates steady at 1.5% while delivering a thoroughly neutral bias in its accompanying policy statement.
It was largely a rinse and repeat of October’s views, with optimism towards the labour market, public investment and business conditions tempered by weak inflationary pressures, uncertainty over the outlook for household spending and a moderation in the housing market.
Those offsetting factors are providing the RBA plenty of time to see how it all plays out.
It still expects economic growth, inflation and wage pressures will accelerate in the period ahead, although, until it has greater certainty about what’s taking place, rates will remain unchanged — it’s as simple as that.
Why create additional uncertainty by preemptively hiking interest rates? The RBA is acutely aware of that.
Markets seem confident rates will remain unchanged for some time yet, not fully pricing in a 25 basis rate hike until well into 2019 following yesterday’s statement.
Now that markets have had their say, let’s see what Australia’s economic community has made of it all.
Are the markets on the money, or will the RBA adjust rates sooner-or-later than they expect?
Let’s find out.
Bill Evans, Westpac
There remains a difference of opinion between us and the Bank on the growth and inflation outlook. The Bank is expecting above-trend growth next year despite uncertainty around the household sector and with the associated closing of the output gap along and a gradual move towards full employment, they will continue to forecast inflation moving back to 2.5% in 2019.
We accept that if that dynamic does come to pass, then the Bank will see opportunity to raise rates next year. However, our growth outlook is much flatter, particularly given our view on household incomes and wages, and we do not expect that the need will arise to raise rates in 2018.
Shane Oliver, AMP Capital
The RBA remains stuck between a rock and a hard place on interest rates. Improving global growth and the RBA’s own forecasts for stronger growth along with solid business conditions and employment growth argue against rate cuts. But ongoing low inflation and wages growth, uncertainty around consumer spending as highlighted by very weak retail sales in September, signs that the housing cycle is slowing and the still strong AUD argue against a rate hike.
We remain of the view that the RBA will leave the cash rate on hold until a probable rate hike late next year. The risk is that rates won’t start rising until 2019 though.
Ivan Colhoun, NAB
The forecasts and comments on monetary policy suggest the RBA remains comfortably on hold, and is likely to remain so for quite a few months to come. Inflation is below target and unemployment above full employment. While these situations co-exist, the RBA should be happy to let growth run and reduce unemployment, provided household indebtedness does not begin to pick-up speed.
NAB has been suggesting that the course of the unemployment rate and wages will be the critical variables to watch in regards to picking the timing (and eventual pace) of likely interest rate increases by the RBA. Historically lower unemployment has been the missing link to stronger wages growth, though of course there is greater uncertainty about this link in this cycle given the current experience overseas where low unemployment rates have yet to generate a significant lift in wages growth.
NAB expects the RBA to begin a gradual lifting of interest rates in the second half of 2018 as the unemployment rate falls more convincingly. We expect unemployment to be around 5.25% at the end of Q1 next year.
Michael Workman, Commonwealth Bank
Today’s RBA statement was not markedly different to the previous one. An RBA rate rise is definitely in the next chapter. The current chapter has unusually low inflation and wages trends against a background of slowly improving growth in local and trading partner economies. From a monetary policy perspective, the unchanged cash rate of the last 16 months looks to have another year to run.
The RBA did not change their growth and inflation forecasts. The re weighting of the ABS’s CPI was not mentioned. But, in our view, it means that annual headline and underline inflation rates will now be about 0.25% lower over the coming year. From a monetary policy perspective, it gives the RBA some more time to wait before the first rate rise.
We expect the RBA to leave the cash rate at 1.5% for the remainder of 2017 and most of 2018. Wages and inflation developments remain benign. Current market pricing has the first rate rise fully priced in around March 2019. The AUD will, hopefully, be Australia’s buffer against rising overseas interest rates.
Callam Pickering, Indeed
Labour market conditions and inflation remain the key for monetary policy. Recent employment growth has been stronger than expected and data on job advertisements has certainly been encouraging. Wage growth, however, remains persistently low and hasn’t yet responded to a lower unemployment rate and improved business conditions.
Until wage growth begins to improve there is no urgency for the Reserve Bank to hike the cash rate. In fact a rate hike in the current environment could very well be misguided given the current state of household spending. Reconciling the divergence between employment growth and household spending is a key question for RBA officials.
We anticipate that the RBA will leave rates at 1.5 per cent until at least the second half of next year. The market is pricing in one rate hike by March 2019. At present, weakness in mining investment and residential investment, along with downside risks for house prices and household spending, suggest that economic growth may fall short of the RBA’s expectations.
Felicity Emmett, ANZ
We continue to expect the Bank to raise the cash rate by 25 basis points in May next year, and then again in the second half of 2018. While the recent weakness in retail sales and inflation suggests that tighter policy is some way off, our central view is that by the middle of next year the growth outlook will be strong enough to drive a fall in the unemployment rate and an eventual pick-up in wage and price inflation. The Bank’s increased focus on financial stability suggests to us that it will move rates off the current historic low levels a little earlier than it would have in previous cycles, as long as it feels confident that inflation is heading in the right direction.
George Tharenou, UBS
The RBA held rates and stayed ‘neutral’ as we expected. They still see ‘little change’ to their view of improving global growth supporting better GDP and gradually higher CPI, but will likely still downgrade both in Friday’s SoMP.
Looking ahead, we still expect the RBA to keep the cash rate on hold until the second half of 2018 as its waits to see the extent to which better global growth leads to faster domestic activity and CPI, as well as the impact of macroprudential policy tightening on housing and consumption.
Paul Bloxham, HSBC
Despite the recent weak retail sales numbers, the low Q3 CPI print and the ABS announcement that the re-benchmarking of the CPI, due on 31 January, will knock around 0.2percentage points off the CPI measure, the RBA continues to see things as remaining on track. It seems that the RBA has been reassured by the improving global economy and tightening local labour market.
As the RBA Governor stated back in August, it is a ‘reasonable assumption’ that ‘the next move will be up rather than down’ but that ‘it’s quite some time away if things play out as we expect’. Nothing since then appears to have pushed this view off track, although we will get more specific details in the official statement on Friday.
So, it is just a question of timing, which the RBA would never be specific about anyway. In our view, the market pricing is too benign, with current pricing showing a cash rate hike is not fully priced until February 2019.
We expect the tightening labour market will start to put some upward pressure on wages growth in coming quarters, which should support inflation, and that the RBA will want to start to head back towards neutral as soon as it is confident that underlying inflation is clearly on the path back to target.
Stephen Walters, AICD
Reading between the lines, it seems there is a struggle going on at the RBA between competing demands. A case could be made that the Bank should lower the cash rate to provide even more support to weaker parts of the economy, particularly the flagging consumer. On the flipside, though, officials would be concerned about growing financial stability risks associated with keeping the cash rate so low, for so long.
The delicate balance between these competing arguments settles, for now, in the form of a steady cash rate.
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