If the Reserve Bank of Australia’s (RBA) December monetary policy statement is anything to go by, it’s eleventh and final meeting of 2017 was probably a short one.
The bank left interest rates unchanged at 1.5%, continuing the pattern seen since September last year. It also retained a neutral policy bias on the outlook for interest rates, suggesting that trend will likely continue well into 2018.
In the absence of an unlikely rate change in January — when the board is not scheduled to meet — it now appears likely that a new record will be set for the most consecutive months that interest rates have been left unchanged.
We’re fast approaching an unprecedented period of RBA inactivity in other words.
Like the interest rate decision and policy outlook, there were few substantive changes in the December statement with the board making small positive tweaks on the outlook for business investment and labour market conditions. However, it once again noted uncertainty on the outlook for household spending, the largest part of the Australian economy.
And while it softened its tone towards the Australian dollar, noting that it “remains within the range that it has been in over the past two years” compared to November when it said a “higher exchange rate is expected to contribute to continued subdued price pressures in the economy”, it again warned that a higher exchange rate — should that occur — “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
Given the lack of change in the December statement, the movements in the Australian dollar and Australian government bond yields — at least in comparison to prior months — has been fairly muted, indicating that traders don’t think it’s shifted the dial meaningfully on the near-term outlook for interest rates.
Now that the markets have had their say, it’s time to see what economists have made of it all.
Was there something in the statement that others have overlooked, or has its merely cemented the view that rates are unlikely to change for sometime yet.
Let’s find out.
Su-Lin Ong, RBC Capital Markets
Today’s statement covered familiar territory — firmer global activity, an expectation for a return to 3% growth in Australia with a nod to stronger business investment and public expenditure amid ongoing uncertainty over household consumption with an eventual pick up in wages and inflation. There were no real new insights despite a number of key data releases since the board last met with no elaboration around wage developments. The reference to pockets of labour market tightness is not new with the Governor most recently highlighting this in his annual ABE dinner speech last week. Small changes to the statement were largely factual in nature and somewhat historic as the RBA dropped reference to US balance sheet adjustment starting, the firmer AUD since mid year and the flat performance of national house prices over the last 6 months.
Having recently updated their key macro forecasts in the November Statement on Monetary Policy, today’s meeting was never likely to rock the boat much. To our mind, the Governor’s recent speech and Q&A, which hinted at a little more concern over the wages outlook, was more insightful. It was consistent with our view that the suite of labour market indicators are at the top of the list of considerations for policy deliberation and likely to remain so for much of next year. These data will likely influence any shift in policy bias in 2018. As per convention, the board does not meet in January with the first board meeting of the year scheduled for 6 February, shortly after Q4 CPI on 31 January.
Sally Auld, JP Morgan
There was little new or significant in today’s statement with the forward guidance around the policy stance unchanged. According to the Bank, policy remains accommodative and leaving rates unchanged this month is consistent with sustainable growth and achieving desired inflation outcomes over the medium term.
Generally speaking, the RBA finishes the year with both growth and core inflation a little higher than where they were in February 2017, but still falling short of desired levels. The 0.4 percentage point decline in the unemployment rate over the year is the bright point of the RBA’s report card for 2017.
Looking ahead to 2018, we see the RBA on hold albeit with potential to tilt in a more dovish direction as it becomes clear that growth will fail to reach trend or better in [the second half of 2018]. 2018 will be interesting one way or the other for the RBA, simply because the status quo is not delivering desired outcomes on growth, inflation nor financial stability.
Ivan Colhoun, National Australia Bank
The main two changes to the statement were both in the more positive direction. [The first], the outlook for non-mining investment was described as having improved further, with the forward-looking indicators being more positive than they have for some time and, [secondly], there are reports that some employers are finding it more difficult to hire workers with the necessary skills.
Increased difficulty sourcing suitable labour is normally a precursor to reduced spare capacity in the labour market and a strengthening in wages. However, so far “wages growth remains low”. Other indicators of the labour market such as The NAB Business Survey and SEEK job ads suggest employment growth will continue in coming months
There is no Board meeting in January, with the Board next meeting in early February after the release of the Q4 CPI.
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. NAB’s forecast remains for the AUD/USD to decline modestly to around .7300 over the next 6-12 months as the USD strengthens.
Felicity Emmett, ANZ Bank
The RBA looks likely to be on hold for the next few months. The recent weakness in wages would have been disappointing for the Bank, although it continues to look for a pick-up in wage growth. We expect that by the middle of next year the Bank will be confident enough that wages and inflation are picking up to lift rates off the 1.5% low. This view remains consistent with our RBA Bias Index which continues to point to two rate hikes next year. The trajectory of wage and price inflation will be critical to the monetary policy outlook.
Tomorrow’s GDP measure of wages will be important for the Bank’s thinking.
On the currency, the RBA sounds more comfortable which is not too surprising given the AUD is down 5% against the USD and 6% on a TWI basis since the highs around mid-year.
Paul Dales, Capital Economics
The Reserve Bank of Australia (RBA) didn’t say as much in the statement released after it left interest rates at 1.5% for a 16th month today, but its Christmas wish must surely be for much more economic growth and a lot more inflation next year. We don’t think any such wish will be granted.
There are no hints that the RBA is getting closer to raising rates. If fact, recent comments suggest that the RBA believes the first rate hike has become a more distant prospect. We interpreted the comment in Lowe’s speech that “there is not a strong case for a near-term adjustment in monetary policy” as indicating that the RBA doesn’t think it will be in a position to raise interest rates next year.
We still believe that GDP growth next year is more likely to be 2.5% rather than 3.0% as the RBA expects and that underlying inflation will remain below the 2-3% target for at least a year longer than the Bank hopes. If so, then interest rates may not rise until late in 2019.
Shane Oliver, AMP Capital
As has been the case for some time now the RBA expects growth to pick up to around 3% or just above over the next few years, and is getting more confident that a pick up in non-mining investment and increased infrastructure spending will help on this front. And it sees stronger growth along with continuing labour market strength driving an eventual pick up in wages growth and inflation.
However, for now it remains in wait and see mode thanks to uncertainty hanging over the outlook for consumer spending and wages growth and inflation remaining low. At the same the RBA continues to warn that a stronger AUD would likely result in slower growth and inflation than forecast and worries about the overheated Sydney and Melbourne property markets have receded with national home prices flat over the last six months.
While a tightening Fed in the year ahead and an on hold RBA are likely to contribute to a fall in the value of the Australian dollar, given weak inflationary pressures and some uncertainty around growth this would be a desirable development and so wouldn’t prompt an RBA move unless the AUD crashed causing a surge in inflation, which looks unlikely.
Given all this, we remain of the view that the RBA won’t start raising interest rates until late next year at the earliest.
Callam Pickering, Indeed
Labour market conditions and inflation remain the key for monetary policy. Recent employment growth has been stronger than anticipated 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.
We believe that there is reason to be optimistic on wages, particularly now that businesses are reporting a greater difficulty in finding new staff, but we think that the Reserve Bank should wait for that improvement to materialise rather than acting preemptively. Slack in the labour market remains quite high, despite the fall in the unemployment rate, which indicates that while wages might improve they won’t return to normal levels anytime soon.
Annual inflation remains low and, without a strong contribution from wages, we consider it unlikely that core inflation will push above the lower end of the RBA’s target band of 2-3%. We also continue to export low inflation from abroad, with inflationary conditions remaining quite weak across most advanced economies. Recent developments in the United States, related to the Trump administration’s tax cuts, could put downward pressure on the Australian dollar and push domestic inflation higher in 2018.
We anticipate that the RBA will leave rates at 1.5% throughout 2018. The market doesn’t expect a rate hike until mid-2019. Nothing that the RBA has recently said contradicts this view. There are upside and downside risks to this view: if improvements in business conditions persist, leading to greater investment, then the economy could outperform expectations. However, softer residential investment and house prices are now a reality and weakness in retail spending warrants close attention.
George Tharenou, UBS
Overall, the RBA held rates and stayed neutral, as we expected. The RBA still see improving global growth as supporting better Australian GDP and gradually higher CPI despite recently again cutting their GDP and inflation outlook. Looking ahead, we still expect the RBA to keep the cash rate on hold until November 2018, but with the risk of a later move if consumption weakens and drags on the inflation outlook.
Michael Workman, Commonwealth Bank
Today’s RBA statement was similar to the previous one. The RBA, in our view, has a “neutral” monetary policy bias. The growth outlooks for the global and domestic economies are improving. But against a background of unusually low inflation and wages trends. We do not expect an RBA rate rise till late 2018. The RBA has been on hold since the last rate cut in August 2016.
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