A tortured RBA Statement – they make the case to ease policy, but held steady for no apparent reason
This is one of the more tortured RBA policy statements for some time. They have basically made a case to cut rates, suggested that their forecasts imply that they need to, but then have held off, hoping they are wrong and unemployment falls faster than they currently expect.
For what purpose are they holding out? With inflation languishing far below target and market-based inflation expectations down sharply more than other major economies in the last six months, there is not a sensible explanation. It appears that they have befallen to political pressure to hold off until after the election; if so, there goes the RBA’s credibility.
The RBA Governor’s statement following the monetary policy decision to hold rates steady at 1.5% said:
“The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”
The RBA is forecasting only trend growth and very little improvement in the labour market. As such, its own forecasts suggest spare capacity is likely to remain, and even this is arguably pushing credibility.
Since inflation is currently far below target, the statement seems to say we need to cut rates because we are not forecasting any significant improvement in the labour market.
The earlier paragraph on inflation said: “The inflation data for the March quarter were noticeably lower than expected and suggest subdued inflationary pressures across much of the economy. Over the year, inflation was 1.3 per cent and, in underlying terms, was 1.6 per cent.”
This assessment is bending the facts, the RBA has chosen the highest of the underlying inflation measures (trimmed mean). The weighted median was 1.2%y/y and CPI excluding volatile items was 1.3%. This suggests that underlying inflation is likely to already be undershooting the RBA’s estimates.
“subdued inflationary pressures across much of the economy” ….. not a comment that breeds confidence. Why then if your inflation bogey is 2.5% are you doing nothing? It doesn’t make a lot of sense. One might conclude that the RBA has held its fire because of the national election in less than two weeks. Perhaps after the election, if the labour data shows no clear additional strength, the RBA will proceed to cut.
If so it will look like a cynical effort to work around the election, making the RBA appear a much more political animal. Perhaps for appearance’s sake, they will wait a month or two longer?
The quarterly Statement on Monetary Policy (SMP) is due on Friday. The statement today alludes to the forecast changes in the SMP. By opting to hold rates steady, the RBA appears to have minimized as much as possible the changes to their forecast since February.
The statement said: “The central scenario is for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that. In headline terms, inflation is expected to be around 2 per cent this year, boosted by the recent increase in petrol prices.”
This suggests that their SMP on Friday will show a quarter-point reduction in its underlying inflation forecasts for the end of this year, and 2020, leaving the forecast for 2021 unchanged at 2.25%.
The statements said: “The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020.”
This suggests the SMP will show a quarter point reduction the GDP forecast this year, and unchanged in 2020 and 2021. (operating close to trend).
The statement said: “The unemployment rate has been broadly steady at around 5 per cent over this time and is expected to remain around this level over the next year or so, before declining a little to 4¾ per cent in 2021.”
This suggests that there may be a marginal increase in the forecast for unemployment in 2020 from 4.9% to 5.0%, but no change in the forecast to fall to 4.8% in 2021.
The forecasts provide the cover for the RBA to hold the line on rates with no apparent difference in its 2021 numbers since February. This suggests that the RBA remains relatively optimistic and patient in returning inflation to target.
However, a notable difference in the statement today, compared to previous ones is that the RBA has removed the comment that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
This omission seems to admit that the RBA does not have the right policy settings.
In its place, the RBA has said that “further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”
It had noted in minutes and speeches that it was watching the labour market more closely, so this may not seem a big change, but they are hinting here that they want to see evidence that the labour market is tightening further (something they don’t forecast until 2021).
Earlier in their paragraph on the labour market, they repeated their line that “vacancy rate remains high and there are reports of skills shortages in some areas.” (notably leaving out that job ads have fallen steadily over the last six months).
But they added that “Despite these positive developments, there has been little further progress in reducing unemployment over the past six months.” Given that in the closing paragraph they say “further improvement in the labour market was likely to be needed for inflation to be consistent with the target.” This seems to suggest that the RBA wants to see faster improvement in the labour market than has occurred, or than they are currently forecasting.
The fact that the RBA did not cut rates generates confusion over what they are waiting for. Their forecasts appear to be manufactured to sit just in the range that allows no action, but they no longer say that they expect progress towards their target They also say they need to see improvement in the labour market. Unclear is exactly how long they intend to monitor labour market developments. But it should not be too long since their own projections suggest they almost meant to cut this meeting but held back for no apparent good reason.
Perhaps the minutes to this meeting in two weeks will help set out the timing on the next cut and help us understand what they are waiting for.
The market has wiped out much of the probability of cut at the next meeting in June, moving the probability to only less than 20%, and the market now seems to favour waiting for three meetings until August. We would not be surprised if the RBA stepped up in June and cut unless global events and the labour data improve from what they are currently forecasting.