As it has done since August 2016, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.5% at its February monetary policy meeting.
While it flagged a downgrade to its Australian GDP growth forecasts over the next two years, and acknowledged that downside risks for both the domestic and global economies have increased, it retained its view that unemployment will gradually fall in the years ahead, helping to lift wage and inflationary pressures, albeit slightly slower than initially thought. Again.
By acknowledging inflation is still expected to eventually return to 2.5%, the midpoint of its 2-3% target, it implies the RBA still believes the next move in the cash rate is likely to be higher.
That’s despite a lengthening list of indicators that suggest momentum in the Australian economy is slowing, creating the potential for inflation to move further away from target, particularly should it slow to the point where unemployment begins to rise.
Financial markets still aren’t convinced that inflation will return to target, continuing to price in around a 50% chance the cash rate will be reduced by 25 basis points by the end of this year.
So who’s right? The markets, collectively, or the RBA?
Here’s a selection of economist views we’ve received following the RBA policy announcement.
Bill Evans, Westpac Bank
For 2019, forecast growth has been revised down from 3.25% to 3%, and 2020, from 3% to “a little less” due to slower growth in exports of resources. It is important that this 3% growth forecast is above the assessed trend rate of 2.75%, and the implied 2020 forecast is likely to be around trend.
If a central bank is forecasting above trend growth, then it is highly unlikely to adopt an easing bias, and indeed the chances are still likely that the Governor will persist with his assessment that even though rates are likely to remain steady for some time, the next move is likely to be up.
With these revised forecasts, the RBA is clearly less comfortable with its previous positive outlook. Its growth forecasts remain significantly above Westpac’s own view. With our forecasts of 2.6% growth in 2019 and 2020, it still seems that the more likely outcome will be for steady rates, even if as we expect, the RBA will eventually have to adopt growth forecasts much closer to Westpac’s current view.
Westpac confirms its long-held forecast that the RBA cash rate will remain on hold in 2019 and 2020.
Felicity Emmett, ANZ
The RBA downgraded its assessment of the economic outlook in the post February Board meeting statement and highlighted additional downside risks. The comments in the statement around the international outlook, the Australian GDP outlook, the labour market and inflation were all less positive than the December statement. Interestingly, the comments on housing were largely unchanged.
Despite the downgrade and increased risks, the bank is still broadly positive about the outlook, with GDP growth expected to be an above-trend 3% this year. Our reading of the statement is that the Bank remains of the view that the next move in interest rates is most likely up, but not for some time. We expect the RBA Governor to say words to this effect when he speaks on Wednesday.
Su-Lin Ong, RBC Capital Markets
We remain of the view that its growth forecasts are still 0.25% to 0.5% too high for 2019 and 2020, with a moderation in domestic demand clearly under way. This implies some further downside risk to the RBA’s inflation forecasts and there is building risk that this is about as good as it gets for the labour market, which suggests that moving sub-5% on a sustained basis for the unemployment rate may prove challenging.
We have long argued that the longer the RBA stays on hold, the less sure we are of which direction the next move will be. The hurdle to cut remains high and fraught with complication including poor transmission through to the real economy and the risk of fueling further imbalances including household debt and asset markets.
We remain of the view that any move from an historical low of 1.5% will demand much weaker global growth and likely considerable external shock. Rate hikes, however, look set to remain in the very distant future and, at a minimum, will need the global pause in QT/further Chinese policy action to stabilise global growth, while domestic housing and consumption find a base.
Shane Oliver, AMP Capital
Our view is that RBA is underestimating the impact of the housing downturn on the economy — both directly via reduced housing construction and also indirectly via reduced consumer spending — and as a consequence we see weaker growth and lower inflation than the RBA is forecasting.
Consistent with this we have seen a string of soft economic data releases this year including for business conditions, business conditions PMIs, consumer confidence, retail sales, housing approvals and housing starts, house prices and job ads. As a result our view remains that the RBA will cut the cash rate to 1% by year end.
Ivan Colhoun, NAB
The noting of increased down side risks, in relation to both global growth and some domestic factors, for us was the most important part of the communication.
We’ll get more information on these downside risks from the Governor’s Speech tomorrow lunchtime, which is entitled “The Year Ahead”. On the basis of the forecasts revealed today, the bank could keep to its mantra of “the next move in cash rates is more likely to be up”, not any time soon and presumably even further away given the trim to growth and inflation.
However, the increased downside risks noted both globally and domestically will likely mean the governor and bank will be less confident of this statement than was the case a few months ago.
The forecasts do not seem to incorporate these downside risks at this stage, which suggests the market will remain priced for the risk that the Bank may further reduce the cash rate if these risks materialise.
Christina Clifton, Commonwealth Bank
The RBA reiterated that they see the main downside risk to the domestic economy to be around the outlook for household spending and falling dwelling prices. The retail trade data released earlier today showed this risk is materialising with a second consecutive weak quarter of retail spending. It looks as if negative effects from weak income growth, macropru measures to improve financial stability and falling dwelling prices are being felt. Retail trade growth has slowed considerably in New South Wales where Sydney dwelling prices have posted a solid fall.
As expected, the line the RBA have been using since late November, “the next move in interest rate is more likely to be up rather than down” was not in today’s Statement. But it’s important to note that it never was. That line was included in speeches, the meeting minutes and the Statement on Monetary Policy (SoMP) documents.
We will hear more from the RBA tomorrow when Governor Lowe speaks. If the line “the next move in interest rate is more likely to be up rather than down” is not included in tomorrow’s speech it would send a clear signal that the RBA have changed their thinking. Based on the forecasts flagged today we expect the speech to retain it.
With dwelling prices falling and consumer spending slowing, it’s looking likely that the RBA will sit on the sidelines for quite a while yet. We think a rate cut would require a deterioration in the labour market and that is not we or the RBA are expecting.