The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.75% at the conclusion of its June monetary policy meeting, an outcome that was widely expected by financial markets.
While that decision surprised few, the board dropped somewhat of a bombshell on financial markets, providing a neutral rates bias in the final paragraph of its policy statement.
“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” said the RBA.
Many had been expecting an explicit easing bias to be delivered, indicating that rates were more likely to fall rather than remain steady in the period ahead.
Instead, it presented a view that past rate cuts, along with recent declines in the Australian dollar, were already helping to strengthen the domestic economy.
“Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little.
“These factors are all assisting the economy to make the necessary economic adjustments.”
Continuing the theme of recent months, the board suggested that “an appreciating exchange rate could complicate this”, a subtle warning to investors looking to drive the currency higher.
On inflation, the main factor behind the rate reduction in May, the board noted that it had been “quite low”.
“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” read the statement.
In regards to recent strength in the residential housing market, particularly in Sydney and Melbourne, the board reaffirmed that “the effects of supervisory measures have strengthened lending standards in the housing market”, adding that “a number of lenders are also taking a more cautious attitude to lending in certain segments”.
In terms of certain segments, it’s likely that the bank was referring to investor lending, something that decelerated sharply in recent months according to the bank’s own private sector credit metrics.
Although the board acknowledged that house prices had “begun to rise again recently”, it hinted that increased supply — predominantly from units — could mitigate price pressures.
“Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities,” it said.
Following last week’s bumper March quarter GDP report, something that revealed that the Australian economy grew by 3.1% compared to the levels of a year earlier, the bank was upbeat, noting that “overall growth is continuing, despite a very large decline in business investment”.
“Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend,” it said.
In relation to the labour market, while the board acknowledged that recent data had been “mixed”, it suggested that it was still consistent “with continued expansion of employment in the near term”.
On the external economic environment, the board noted that economic conditions in major advanced economies “improved over the past year”, helping to counteract difficulties “for a number of emerging market economies”.
On China, a key determinant to the health of the Australian economy, the board stated that “growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook”.
The board also acknowledged that the were upcoming risks to financial markets, presumably related to the UK referendum to leave the European Union, known across markets as “BREXIT”.
“Attention is now turning to some particular event risks,” said the bank.
Despite the event risk facing markets and the benign outlook for domestic inflation, the tone of the statement oozed cautious optimism, providing little indication that the bank believes that there’s an urgent need to further stimulate the economy.
The tone of the statement, in conjunction with the absence of a clear easing bias, certainly surprised financial markets, especially given many were expecting that the board would signal that another near-term rate cut was likely.
The AUD/USD currently sits at .7422, up 0.76% from Monday’s close, while Australian stocks are now trading flat, having been up as much as 0.8% earlier in the session.
Bonds have also weakened, indicating a reduced likelihood of lower interest rates to come. Mirroring this view, cash rate futures now price the odds of a rate cut in August at less than 50%.
In the absence of near-term unexpected market turmoil, the next truly live rate meeting now looks to be when the RBA meets on August 2, something that will follow the release of Australia’s June quarter CPI report in late July.
This will also give time for the RBA to gauge additional domestic economic data, evaluate monetary policy movements from the US Federal Reserve and clear both the Australian federal election and UK BREXIT vote.
You can access the RBA’s full June monetary policy statement here.