The RBA does not sound like a bank that thinks it is going to cut rates

A sleeping dog. Image: Chris Livingston / Getty Images

The Reserve Bank has released its latest quarterly statement on monetary policy (SoMP). The document makes clear that the RBA was not expecting the strength in employment that Australia has experienced since the last SoMP in November.

That’s a very positive shock in what has increasing become a clouded outlook in 2016.

The bank also highlights that the combination of monetary policy and the lower Australian dollar continue to work together to support the economy (our emphasis):

The Reserve Bank Board reduced the cash rate by 50 basis points in the first half of 2015. The available data suggest that the accommodative stance of monetary policy and the depreciation of the exchange rate since 2013 have supported growth and assisted the rebalancing of economic activity towards non-resource sectors of the economy. This process has been particularly apparent in the labour market. Employment growth over 2015 was stronger than was expected a year ago and the unemployment rate fell by more than had been expected. Despite this, output growth has remained below average

Like the governor’s statement on Tuesday the RBA highlighted that the global turmoil has given them pause to consider the negative effects that may flow from 2016 market ructions. The bank again highighted that low inflation provides “scope for easier policy, should that be appropriate to lend support to demand.” While the bank also reiterated that it is wait and see mode and will assess any “new infoarmation “to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and local demand.”

But it’s clear this is not their base case. The RBA appears to retain a fairly sanguine outlook for growth, both in Australia and in the countries that are important to Australia.

“Growth in Australia’s major trading partners is forecast to remain around its current rate over the next two years. The US and euro area economies are expected to grow at an above-trend pace, while growth in the Asian region is expected to ease a little further, driven by a further moderation in Chinese growth,” the bank said in the SoMP overview.

There are naturally still risks around the path of commodity prices which remains “uncertain.” Driving that uncertainty is China and the timing of the “responsiveness of the global supply of commodities to the decline in prices seen to date.”

No doubt because of this uncertainty the RBA threw in a veiled reference to a hope that the Australian dollar might fall a little further still.” As a result of the decline in bulk commodity prices from late last year, the forecast for Australia’s terms of trade has been revised down a little further, although the exchange rate has been little changed since then,” the RBA said.

On the housing front the bank acknowledged that “conditions in the housing market more generally have eased,” since last September for building approvals and house price growth.

The also acknowledged that the drag from the end of the mining boom would continue into 2017.

Overall the SoMP reads suggests the RBA retains great comfort with current settings and the economy would need to diverge materially from current forecasts for them to act on their easing bias.

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