The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5% at its October monetary policy meeting, an outcome that was widely expected by markets and economists alike.
In the final paragraph of the accompanying monetary statement in which the bank communicates its bias on the outlook for interest rates, there was no conditional easing bias found, suggesting that another rate cut this year, perhaps as soon as November, may not be on the cards.
“Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” it read.
In July, before the RBA cut interest rates to 1.5% on the back of another subdued core inflation reading in the June quarter, the bank stated that “over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.
Despite the absence of a conditional easing bias ahead of the Q3 CPI release on October 26, there were a number of noticeable tweaks made to the statement that suggest, on balance, that rates are still more likely to fall than rise in the period ahead.
On the domestic economy, the board said that it “is continuing to grow at a moderate rate” with “the large decline in mining investment being offset by growth in other areas, including residential construction, public demand and exports”.
However, while growing at a reasonable pace, the board acknowledged that household consumption, the largest component within the Australian economy, “appears to have slowed a little recently”.
The tone towards the labour market was also cautious with recent indicators seen as “somewhat mixed”.
“The unemployment rate has fallen further, although there is considerable variation in employment growth across the country,” the statement read. “Part-time employment has been growing strongly, while growth in full-time employment has been subdued.”
Although mixed, it noted that “forward-looking indicators point to continued expansion in employment in the near term”.
On the outlook for inflation, the main catalyst behind the two rate cuts delivered so far this year, the language used by the board was unchanged from September.
“Inflation remains 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,” it said.
The board also said that low interest rates “have been supporting domestic demand” with the weaker Australian dollar “helping the traded sector”.
“These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this,” it said, maintaining the same wording used in September.
On housing, the other main area of interest in light of recent strength in auction clearance rates, new home sales and building approvals figures, it said that “the rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently”.
It also noted that “growth in lending for housing “has slowed over the past year”, acknowledging that “turnover in the housing market has declined”.
It also suggested that “growth in rents is the slowest for some decades,” an interesting addition to the October statement, particularly as rents are an influential component within Australia’s quarterly CPI release.
Like September, and fitting with recent building approvals data released by the ABS, it also stated that “considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities”.
On the outlook for the global economy, the RBA noted that it “is continuing to grow, at a lower than average pace”.
“Labour market conditions in the advanced economies have improved over the past year, but growth in global industrial production and trade remains subdued,” it said.
It also said that “actions by Chinese policymakers have been supporting growth, but the underlying pace of growth in China has been moderating”, the same language used in September.
Despite the absence of a clear easing bias in the October policy statement, the language found in the statement — particularly towards household consumption and labour market conditions — suggests that another rate cut remains a possibility.
Upcoming retail sales, housing, inflation and labour market indicators, along with the actions of other major central banks, especially the US Federal Reserve, will likely determine whether or not further easing is delivered.
In the wake of the October policy statement, the Australian dollar has weakened fractionally, trading at .7664 against the US dollar having been above .7680 prior to its release.
Despite the movement in the Aussie, cash rate futures have further reduced the probability of a 25 basis point cut being delivered in November, putting the odds at 19%, down from 23% before the statement was released.
“Since the move in August the only real candidate for another move was going to be November when fresh information on inflation would be available and the Bank would have the opportunity to justify any move with its revised forecasts,” said Bill Evans, chief economist at Westpac.
“We are not expecting to see any significant revisions to the growth forecasts and our forecast for underlying inflation in the September quarter also points to no significant change in the outlook for inflation.
“Consequently we see prospects for a rate cut at the November Board meeting being remote,” he says.
Here’s the full October monetary policy statement, the first released under new RBA governor Philip Lowe.
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