RBA keeps fire on hold – Westpac

Matthew Hassan, Research Analyst at Westpac, explains that as expected, the Reserve Bank Board of Australia has decided to leave the official cash rate unchanged at 1.50%.

Key Quotes

“The Governor’s decision statement included some notable shifts since May – acknowledging weaker commodity prices (“as expected”) and the slower growth picture for the March quarter (“reflecting the quarter to quarter variation in growth figures”) but reaffirming the Bank’s positive growth outlook (“…still expected to increase gradually over the next couple of years to a little above 3 per cent”).”

“The discussion around business investment is more constructive: the mining investment downturn is “almost complete”, business conditions have improved, capacity utilisation has tightened and business investment has picked up in ‘non mining’ states. Contrast this to May’s comment that “Non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome”. The somewhat disappointing Q1 capex survey investment plans also do not get a mention.”

“Comments on the labour market are perhaps a little less confident – indicators are still seen as mixed but last month’s line that “the unemployment rate is expected to decline gradually over time” has been dropped. The slow growth in wages is also described as “restraining growth in household consumption”, a view that was implicit in previous comments that consumption growth was expected to track “broadly in line with incomes” but arguably a slightly new angle on the Bank’s concerns about weak wages growth.”

“On housing, the Bank again notes that “prices have been rising briskly in some markets” but adds that “there are some signs that these conditions are starting to ease”.”

“On the AUD, the standard comment that “an appreciating exchange rate would complicate” the transition following the mining investment boom is retained as per May (and every Governor’s statement since April last year).”

“Conclusion

• Dissecting the Governor’s decision statement can be tricky, particularly distinguishing simple statements of fact from shifts in emphasis and thinking. While there is always room for speculation, most of the changes this month seem to be acknowledging developments rather than marking a shift in the Bank’s core thinking. Certainly there is no explicit policy bias being expressed and the Bank seems to have gone out of its way to reaffirm its “growth gradually increasing to a little above 3 per cent” view (something that is a little unusual the day before official figures are released – the preferred approach more often to be less explicit).
• The structure of the statement is also worth noting. The most important concluding paragraph is completely unchanged, stating policy was unchanged and giving no forward guidance. The penultimate paragraph discusses housing market conditions, a key area of concern for the Bank according to its most recent minutes, and the focus of its latest macro-prudential policy measures. Other discussion points are given less prominence.
• All up, we see no reason to change our current view that the official cash rate will remain on hold throughout 2017 and 2018.”