The Reserve Bank of Australia (RBA) left interest rates steady at 1.5% at the conclusion of its July monetary policy meeting, an outcome that was expected by economists and markets alike.
However, the question everyone wanted answered today was whether the RBA would turn hawkish on the outlook for policy like other major central banks, paving the way for a potential rate hike in the months ahead.
The answer, in short, was unequivocally no.
“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” the bank said in the final paragraph of its statement, providing a clear neutral bias indicating that rates are unlikely to move in either direction anytime soon.
Reinforcing that view, the bank also refrained from making any sweeping changes to its view on labour market conditions, largely repeating what it said in June.
“Indicators of the labour market remain mixed,” it said, mirroring what was said four weeks earlier. It acknowledged that employment growth has been “stronger over recent months”, although that too was unchanged from June.
The only noticeable omission was that it no longer referenced weakness in total hours worked, something that was likely driven by a spike in the May jobs report released by the ABS.
Plenty had been expecting the RBA to convey a more optimistic view given recent strength in a variety of labour market indicators.
Given the language on labour market conditions was largely the same, it came as no surprise that the bank’s views on wage growth and inflation were also largely unchanged.
Despite the recent hiring surge it said that wage growth “remains low… and this is likely to continue for a while yet.” It also repeated that inflation is “expected to increase gradually as the economy strengthens”.
Much of the discussion on the domestic economy centred around the weak Q1 GDP report released after the board’s June policy meeting.
However, while it’s view that the Australian economy is likely to strengthen “gradually” was the same, there was a noticeable tweak on the level of growth expected.
On the GDP growth slowdown in the March quarter, it said it “partly” reflected temporary factors, hinting that it was not just one-offs that drove the weakness, but other more-entrenched factors as well.
It said that consumption growth “remains subdued” reflecting “slow growth in real wages and high levels of household debt,” providing a hint as to what those factors were.
Notably, and perhaps in response to the weakness in household consumption, it dropped its reference to economic growth increasing “gradually over the next couple of years to a little above 3%”, instead noting that it would now “strengthen gradually”.
A small-yet-significant tweak.
However, while on the surface a slightly more cautious view, it said that growth remains supported by low interest rates, along with previous declines in the Australian dollar.
“The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment,” it said, mirroring the June statement.
On the state of the global economy, it’s language was also much the same.
“The broad-based pick-up in the global economy is continuing,” it said.
It made mention of a recent decline in headline inflation rates, noting that they “have declined recently in response to lower oil prices”.
It added that wage growth remains “subdued in most countries, as does core inflation”. Previously it described core inflation as being “low”.
In line with recent market moves, it dropped its reference to long-term bond yields being “low”, but left its language on the outlook for policy from major central banks unchanged.
“Further increases in US interest rates are expected and there is no longer an expectation of additional monetary easing in other major economies,” it said.
With much of the July statement unchanged or similar to that conveyed in June, the RBA’s neutral bias has disappointed those who were a more hawkish shift in rhetoric following similar moves from the ECB, BoE and BoC in recent weeks.
There was no such shift today, with the tone of the statement perhaps a little less confident than that presented in June.
While these things are always up for interpretation, the omission of the line that Australian economic growth increasing gradually to a little over 3% in the next couple of years may signal that the bank is now less confident that its forecasts will be met.
Coupled with a largely unchanged view on the labour and housing markets, it merely reinforced the view that the RBA has no intention of switching to a hawkish bias, at least in the short-term.
Given some were expecting a hawkish tilt, it has seen some sharp moves in Australian financial markets in response to today’s statement.
The Australian dollar has been hammered, losing close to 1% from its earlier session highs, while Australia 3-year government bond futures have rallied by 7 ticks to sit at 98.06.