The Reserve Bank of Australia (RBA) hasn’t moved interest rates since August 2016.
And if its commentary is anything to go by, that record-breaking period of policy stability — now standing at 19 meetings — look set to continue for some time yet with the bank offering an unequivocal neutral policy bias in the final paragraph of the statement, indicating that rates are going nowhere fast.
While there were a few changes in the May statement, including an admission that employment growth has slowed in recent months, it’s clear that until the RBA is confident enough that stronger growth and labour market conditions begin to boost wage and inflationary pressures, rates will remain on hold.
It thinks that will happen, gradually, but until the data confirms it, there’s no need to snuff out the recovery before it truly begins.
Financial markets were clearly underwhelmed by the May statement, barely budging following its release — a sure sign that nothing much has really changed.
However, was the RBA’s latest offering really that bland?
Now they’ve had time to peruse it, it’s time to see what economists have made of it all.
Did the markets miss something, and are there likely to be any changes to the RBA’s updated economic forecasts released in a few days time?
Let’s find out.
Sally Auld, JP Morgan
There were quite a few topics on which the RBA could have elaborated on such as the Australian dollar, front-end funding rates, developments in macro-prudential policy and inflation, but in the main part the statement remains little changed from last month.
Perhaps all that can be said is that the RBA’s straight bat is interesting in itself, given recent developments. The past month has delivered further disappointments on Q1 global growth, a dovish tilt to recent central bank commentary (BoE, BoC, Riksbank etc.), new macro-prudential initiatives from APRA, higher funding costs for the banks and tighter lending standards for mortgage borrowers.
While some of these are likely to be temporary such as the Q1 global growth soft patch, others are likely to prove both enduring and relevant for the domestic growth outlook such as tighter lending standards, new macro-prudential initiatives and, potentially, higher funding costs for banks.
It seems that until these present in the form of softer growth outcomes relative to forecast, the RBA will remain firmly on hold and content to hold the view that the next move in rates will be up. We agree with the former, but have less conviction in the latter.
Shane Oliver, AMP Capital
It made little change to its post meeting statement, except to acknowledge the tightening in US and Australian money markets — which has actually started to unwind a bit — the rise in the price of oil and the recent decline in the Australian dollar and a return to expecting growth this year and next to be a little above 3%. However, there was nothing here to suggest an imminent change in monetary policy.
While the global backdrop, business conditions, non-mining investment and infrastructure activity are positive and will lead to some acceleration in growth, uncertainty remains around the outlook for consumer spending — household debt is high, banks are tightening lending standards, wage growth and inflation remain low and will pick only gradually and house prices are falling.
As a result, the RBA is likely to remain on hold for a long time yet and we don’t see a rate hike until 2020 at the earliest.
Kate Hickie, Capital Economics
By repeating for the fourth consecutive meeting that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”, the RBA gave no indication that it is about to change its tune. A near-term rate hike remains off the agenda.
Even if the RBA leaves its forecasts largely unchanged in Friday’s SoMP, we suspect that the Bank will eventually have to revise down its optimistic growth projections. And with inflation also likely to remain a little weaker than the RBA expects, interest rates are unlikely to rise until late in 2019. The markets are coming around to this view, although expectations may fall further yet.
Ivan Colhoun, National Australia Bank
There were very few changes — and none of significance — in today’s monetary policy announcement.
The bottom line is the Bank, and markets, continue to watch the data. Further progress is needed towards an unemployment rate of 5% and an inflation forecast heading towards 2.5%.
We will get greater detail on the Bank’s thinking in this regard on Friday with the release of the latest quarterly forecasts, but for now, progress remains slow, though indications remain that the pace of growth is lifting somewhat as mining, Western Australia and infrastructure improve.
Bill Evans, Westpac
We will receive a much more detailed update on the Bank’s views in the Statement on Monetary Policy on Friday. Since the last Statement, housing markets have slowed further, financial conditions have tightened, employment growth has slowed and equity markets have become more volatile.
All of these factors point to the Bank having even more scope to remain patient with respect to policy.
As we have consistently argued since mid- 2017, Westpac continues to expect that the cash rate will remain on hold in 2018 and 2019.
John Peters, Commonwealth Bank
The next key economic signposts for markets and analysts to eyeball in trying to get a handle on the possible timing of any RBA tightening will be this evenings speech by RBA Governor Lowe and Friday’s RBA quarterly Statement on Monetary Policy (SoMP).
Today’s post Board commentary clears the way for Governor Lowe to deliver a positive economic talk tonight. And today’s Statement also indicates that the RBA is keeping with its bit over 3% per annum GDP forecasts and bit above 2% per annum CPI projections.
The 2018/19 Federal Budget on 8 May, the Q1 Wage Price Index on 16 May, and the next few monthly labour force numbers are other key markers. Any larger than expected fiscal easing via tax cuts and/or increased spending would likely bring forward the timing of any RBA rate hike than otherwise would have been the case. Watch this space!
We expect the RBA to leave the cash rate at 1.50% until November 2018. The key risk to this view is that the RBA will wait a bit longer before moving given the absence of any intensifying wage or price pressures to date and widespread evidence of moderating house prices. Current market pricing has the first rate rise fully priced in Q1 2019.
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