RBA policy statement steers a steady course (6 Aug)
The RBA policy statement retained the key elements keeping rates stable largely as expected.
It downgraded its view on China from “continues to grow solidly” to “has slowed a little”, and noted that China was “easing policy” and retained its assessment that China was “continuing to pay close attention to the risks in the financial sector.”
Of the higher funding costs for Australian banks, it said: “Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.” An acknowledgement that financial conditions were a bit tighter than a month earlier.
Its assessment of the growth outlook, employment and wages were largely unchanged. It paid lip-service to the drought-affected farmers. Growth is “expected to average a bit above 3 per cent in 2018 and 2019.”
It gave a bit more colour on its unemployment forecast, saying that “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent.” This suggests that it sees the labour market close to fully employed in two years.
This might seem a touch more optimistic than its previous assessment that “a gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year.” Perhaps it is an acknowledgement that the unemployment rate has made a bit of progress towards lower levels, recording 5.4% in May/June.
It retained its view that “the Australian dollar remains within the range that it has been in over the past two years.”
On the housing market, it was a bit more bearish noting that “nationwide measures of rent inflation remain low.”
Its final paragraph on policy guidance was unchanged, noting progress towards targets is “likely to be gradual” implying rates are expected to be on hold for some time.
It will be interesting to see if the RBA again notes in Lowe’s speech tomorrow and the SoMP on Friday that it expects the next move in rates to be higher. Since there is no change in their key forecasts and outlook, we should presume this is still their central forecast. However, it will be interesting to see how they assess the risks around this forecast. It seems they are still reluctant to see room to cut rates further.
It said, “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
We sold the AUD ahead of the statement, expecting little change in the statement, but seeing a risk that it might show greater concern for downside risks from abroad and the housing market. At the margin, it has done so, but it has reinforced its message that it expects to the economy to retain above-trend growth and return to its inflation target in time. There is not enough in this statement to weaken the AUD. However, we prefer to stay with our short position in light of the risks as we see them related to housing and Chinese financial and economic developments.