After weeks of speculation as to whether or not it would turn hawkish on the outlook for monetary policy like other major central banks, the Reserve Bank of Australia (RBA) answered that question with a resounding “no”, delivering an unequivocal neutral bias its July monetary policy statement.
Official interest rates, based on what the RBA communicated, are going nowhere for some time yet.
Financial markets have reacted, unwinding much of the speculative moves in the Australian dollar and bond markets that were centred around a more hawkish shift from the RBA.
The Aussie dollar got hammered and bonds were bid, hinting markets had got a little ahead of themselves.
While the markets have had their say, it’s now time to see what Australia’s economic community has made of it all.
Are the RBA just foxing, waiting for other central banks to start removing stimulus before going down that path, or does this mean that rates will be on hold for a prolonged period, perhaps looking one year ahead or beyond?
Let’s find out.
Sally Auld, JP Morgan
There were some interesting changes to the Statement that we didn’t expect and which lend today’s communication an ever so slight dovish tinge relative to June. Not only did the RBA drop its reference to the 3% GDP growth forecast, but it observed that the recent slowdown in GDP growth in the March quarter could only be “partly” attributed to temporary factors. Further, the narrative around consumption appears a little more cautious, with the RBA noting that “…consumption growth remains subdued, reflecting slow growth in real wages and high levels of household debt.” Perhaps the RBA is softening the ground for some downward revisions to growth forecasts in the August Statement on Monetary Policy?
In summary, we read today’s Statement as a clear indication that the RBA has explicitly chosen not to adopt a more hawkish tone to its rhetoric. Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia. Not only are mortgage rates rising independently of the RBA cash rate, but it is not clear that recent data have been robust enough to tilt risks towards better growth and inflation outcomes.
Taken against the backdrop of still solid global growth outcomes, and a hawkish shift in commentary from the ECB, BoE and BoC in recent weeks, today’s RBA Statement underscores that there has been no material reassessment of the domestic policy outlook in Australia.
Kristina Clifton, Commonwealth Bank
There are a couple of points worth noting from the statement. First of all last month’s commentary around the unwinding of some of the earlier commodity price increases was taken out. This is because bulk commodity prices are noticeably higher than they were a month ago. However it is unlikely that the RBA has changed its assumption of an easing in commodity prices over the next year or so.
The weak Q1 GDP outcome was downplayed, with part of the weakness “reflecting temporary factors”. Today’s statement takes out the reference to growth increasing to a “little above 3%” in a couple of years. It is likely that the near term growth forecasts will be revised down in the August SoMP to account for the recent weather affected growth outcome. Although we think the longer run forecasts will remain unchanged.
Interestingly, on the labour market, the governor has maintained the assessment that “indicators of the labour market remain mixed”. We had thought they might have been a little more upbeat on the jobs market given the three consecutive very strong employment outcomes of the past three months.
There was nothing in today’s statement to shift our view that rates will stay on hold for some time. On the inflation front, the RBA’s forecasts do not have underlying inflation coming back to the lower end of the 2-3% target until mid 2019, so we need to see the RBA lift these inflation forecasts materially before rate rises are back on the table any time soon.
Matthew Hassan, Westpac
The July statement gives little additional information with only incremental changes in commentary. The minutes may provide some additional insight, particularly if medium term policy normalisation issues were discussed. However, we suspect the bank will continue to hold a pointedly neutral stance on policy guidance. The August meeting could see a more material review of its commentary, with a key update on CPI inflation due July 26 and the bank reassessing its economic forecasts ahead of the August Statement on Monetary Policy, due out August 4.
However, even with some potential downgrade to 2018 growth forecasts — Westpac continues to expect growth of 2.5%, well below the bank’s 3.25% mid-point forecast — none of this is likely to present enough of a case to establish an explicit policy bias.
All up, we continue to see no reason to change our current view that the official cash rate will remain on hold throughout 2017 and 2018.
Su-Lin Ong, RBC Capital Markets
There were limited new insights from the RBA today. The tone was balanced with perhaps more caution than expected given the firmer global backdrop, upbeat tone from global central banks, and encouraging domestic labour market indicators.
The omission of a likely return to 3% plus growth suggests that the RBA is laying the groundwork for yet another downward revision of near-term growth forecasts. This is not especially surprising given the weak Q1 GDP print and likely low cyclone-affected Q2. Even assuming a decent bounce back in activity in H2, we struggle to see growth much above 2% in2017. The RBA are likely to mark down their 2.5-3.5% GDP forecast for end 2017 and may well shift down slightly their 2018 and 2019 forecasts.
Continued sub-trend growth and sub target inflation suggests that the RBA is unlikely to be joining its global counterparts in removing accommodation anytime soon. A number of domestic challenges lie ahead including a peak in residential construction, lower house price growth, tighter financial conditions and constrained households. Growth will likely continue to disappoint the RBA in a familiar pattern of the last few years.
Paul Bloxham, HSBC
Observers that were looking for a hawkish tilt from the RBA today will have been disappointed. The statement provided no new forward guidance or hints that the RBA may consider lifting rates any time soon. This is typical RBA style. The RBA tends to provide less active forward guidance than many other central banks. Plus, although we think the RBA should now be completely re-affirmed that it will not need to cut further, given an improving labour market and business conditions, a hike is still likely to be some time away.
So, what is needed to get the RBA to think about lifting its cash rate? In our view, the answer is a pick-up in wages growth. Once there are signs that wages growth is past its trough, we expect that it won’t be long before the RBA is lifting its cash rate.
Shane Oliver, AMP Capital
Apart from acknowledging the soft March quarter GDP outcome the RBA made only minor changes to its post meeting statement: it continues to see a broad based pick up in global growth, expects Australian growth and inflation to gradually pick up while acknowledging the softness in consumer spending and sees signs that conditions in the Sydney and Melbourne property markets are starting to ease and notes that supervisory measures should help address the risks around household debt.
More importantly, the RBA retained a somewhat neutral bias in terms of the outlook for monetary policy. Contrary to the expectations of some, there was no attempt to adopt a hawkish tilt in line with recent comments from the ECB, Bank of England and Bank of Canada.
Our view remains that the RBA will be on hold for the next year at least, with risks around the consumer and a housing slowdown preventing hikes but a fading in the drag from the mining investment slump and solid employment growth heading off cuts.
Around our base case, for the next year we still see more risk of a cut than a hike but by late 2018 and 2019 the risks are likely to swing towards a hike.
David Plank, ANZ
We see the RBA on hold for the foreseeable future. The RBA’s July statement suggests the Bank is a little less certain of the outlook than it was earlier this year, despite the recent strength of the labour market and the continued strength of business conditions. In saying this, we may be at risk of over interpreting the small changes in the statement. Still, we think the removal of reference to 3% plus growth is potentially a material change. We will find out in August when the RBA updates its forecasts.
Scott Haslem, UBS
The RBA stayed broadly neutral as we expected. They see an improving global backdrop supporting better domestic growth and higher inflation. So despite a miss for Q1 GDP at a post-GFC low of 1.7% year-on-year, the RBA still expect a pick-up ahead, but perhaps wavered with no specific “3% plus outlook” given this time. Overall, we continue to expect the RBA to stay on hold ahead, and assess the impact of recent macroprudential policy tightening. The key signs to watch ahead are Q2 CPI and any GDP downgrade in its August SOMP.
Tapas Strickland, NAB
Today’s statement was significant. In not making any substantial changes to the post meeting Statement, the RBA has signalled that it intends to keep rates on hold for some time. This contrasts to recent hawkish rhetoric from a number of central banks and indicates Australia is likely to lag the rest of the world in removing policy accommodation.
This notion also accords with recent public commentary by RBA officials. RBA Board Member Ian Harper noted recently in an AFR interview: “until we get a recovery in the growth of wages we won’t get a recovery in inflation of any note”. Nevertheless, with the global rate outlook shifting and domestic data picking up, it will be important to monitor the soundings from Martin Place for any subtle shifts in view.
NAB continues to see the RBA on hold in 2017 and 2018.
Stephen Halmarick, Colonial First State Global Asset Management
In announcing the rate decision the RBA, again, gave no forward guidance, simply stating that “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”.
It is also significant that the RBA continues to point towards the benefits of some depreciation in the currency, stating that “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”. This would seem to put to bed, at least for the time being, some of the growing hawkish expectations in local markets.
We continue to hold the view that the RBA is likely to maintain the 1.5% cash rate until well into 2018. The RBA leadership has made it clear that they are balancing the risks between a soft domestic economy with limited household income growth, high household debt and a tight housing market and inflation close to the 2%-3% target range.
Callam Pickering, Indeed
Labour market conditions and inflation remain the key for monetary policy. Recent employment growth has been stronger than expected and data on job vacancies point to improved demand for labour. Soft wage growth, however, remains a thorn in the RBA’s side and that is unlikely to change in the near-term despite a fall in the unemployment rate and strong growth in corporate earnings.
Until wage growth begins to improve there is no urgency for the Reserve Bank to hike interest rates, particularly in an environment where the major banks are already lifting variable mortgage rates.
The economy still faces a number of challenges that justifies low interest rates. Mining investment continues to fall, albeit at a slower pace, and residential construction activity has passed its peak. Lower commodity prices, despite some recent improvement, could also put downward pressure on wages and inflation over the remainder of the year.
We expect the RBA to leave rates at 1.5% for the remainder of the year, with any rate hike unlikely to occur until the second half of next year. Further rate cuts could be warranted depending on the impact of lower commodity prices but there is a clear reluctance from the RBA to cut again.
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