The Reserve Bank of Australia (RBA) will announce its final interest rate decision of 2018 later today.
Like the 10 monetary policy meetings already held this year, there is next to no chance the cash rate will change, continuing the period of policy stability that’s been in place since the middle of 2016.
That means that all attention will once again be on the accompanying monetary policy statement, particularly in relation to what the board has to say in regards to the Australian economy, housing, job market conditions as well as recent developments in financial markets and trade dispute between the US and China.
Here’s the state of play.
- It’s been 27 months, or 25 meetings, since the the cash rate last changed — a 25 basis point decrease delivered in August 2016. The current stretch of policy stability is the longest on record.
- Financial markets and economists expect that trend will extend today. All economists polled by Bloomberg expect the cash rate will remain at 1.5%. Financial markets are also certain it will remain unchanged.
- On the broader Australian economy, the bank is likely to repeat that it is “performing well”.
- Ahead of Australia’s Q3 GDP report on Wednesday, it’s view that GDP growth will “average around 3.5%” in 2018 and 2019 is also likely to be retained.
- Previously, the bank described business conditions as “positive” with non-mining business investment “expected to increase”. It also noted that higher levels of public infrastructure investment, and growth in resources exports, are “supporting the economy”. Those views are all likely to be repeated given data received since the board last met, including the Q3 CAPEX report that revealed a sizable pickup in non-mining business investment expectations for the current financial year.
- Offsetting those positives, it will likely describe the outlook for household consumption as “one continuing source of uncertainty”. In November, the bank noted that “growth in household income remains low, debt levels are high and some asset prices have declined”. That hasn’t changed, and recent retail sales data has been weak.
- On current and expected conditions in the labour market, the bank will likely repeat that they remain “positive” with “some further lift in wages growth over time”, albeit “gradually”. The latter reflects recent data on wages for the September quarter.
- The bank’s commentary on domestic inflation and the level of the Australian dollar is likely to be identical or very similar to that offered in November, partially as a result of little new information.
- Inflation remains “low and stable”. Given recent trends in the labour market, and the bank’s updated forecasts, it will retain the view that a “gradual” pickup in inflation over the next couple of years is “expected”. Even with a recent rebound to multi-month highs, the Australian dollar still remains in the “lower part of the range” it has been in over the past two years on a trade-weighted basis.
- Following a recent acceleration in the pace of price declines in Sydney and Melbourne’s housing markets, the bank may downgrade its assessment that conditions “have continued to ease”. According to latest data from CoreLogic, prices fell by 1.4% in Sydney last month, and by 1% in Melbourne. The decline in Sydney was the largest in over a decade.
- While it may be left to the expanded monetary policy minutes that will be released later in the month, the RBA may also touch upon the spillover effects from the housing downturn on the outlook for residential construction activity, especially given concerns that were raised by Philip Lowe and Guy Debelle in speeches delivered in November.
- Whether that’s discussed or not, the bank will likely repeat that “credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality”. Following recent housing credit data, it may also drop the view that growth in credit extended to owner-occupiers “remains robust”.
- Internationally, there is a small risk the bank may temper its assessment that the “global economic expansion is continuing” given recent weakness in Europe and Japan.
- Following a steep fall in crude oil prices since the start of October, it may also flag the potential for softer headline inflation in the period ahead. Previously, the bank said that “inflation remains low, although it has increased due to both higher oil prices and some lift in wages growth”.
- Despite a temporary trade truce announced by the US and China over the weekend, it will likely retain the view that “one ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States”.
- Although pressures have eased in recent weeks thanks to a rebound in stocks, lower bond yields and reduced financial market volatility, it will probably repeat that financial conditions in advanced economies “remain expansionary but have tightened somewhat recently”.
- Given that backdrop, the bank will keep the final paragraph of the statement — where it conveys the outlook for domestic policy settings — identical to a month earlier.
- “The low level of interest rates is continuing to support the Australian economy,” it said in November. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
The RBA December monetary policy statement will be released at 2.30pm AEDT.
Business Insider will have all the details once it hits the screens.
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