RBA tilts dovish
The RBA has tilted policy more dovish. It sees “reasonable prospects” compared to December where “prospects had firmed”.
It hinted it will be watching the data carefully in coming months to judge whether a cut in rates may be appropriate. It said, “New information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand.”
Its view on inflation is also more dovish. In December it said “Inflation is low”. Today it said “inflation is quite low”
In December it said, “Inflation is forecast to be consistent with the target over the next one to two years.” Today it said, “Underlying measures of inflation are also low at about 2 per cent. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.”
No mention here of inflation expected to be consistent with the target. Underlying at 2% is at the fringe of the 2 to 3% target. The RBA appears to see a greater risk it falls below the target.
It retained a reasonably upbeat assessment of the economy, but it was more backward looking, summarizing that which happened last year without expressing a view on the outlook. It said, “The expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.”
This dovetails with the “reasonable prospects of continued improvement”, a less resounding assessment than December where prospects had firmed. And with the need to assess conditions closely over coming months implied in their guidance paragraph.
It has further lowered its global growth outlook. It said, “Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China’s growth rate has continued to moderate.”
It tweaked the statement on the exchange rate. It said, “The exchange rate has continued its adjustment to the evolving economic outlook.” In December, it said, “the Australian dollar is adjusting to the significant declines in key commodity prices.”
So now it is adjusting the evolving economic outlook, before it was adjusting to lower commodity prices. I am not sure we can interpret too much from this. I think it suggests that the RBA would not mind a lower AUD, for broader reasons than just commodity prices.
The market will be looking closely at the quarterly Statement on Monetary Policy released on Friday. I think we can conclude that the RBA sees the balance of risks having tilted towards a need for more accommodative policy. But like other central banks it feels its visibility is clouded at the moment and it will be watching the data in coming months for clues. The odds of a cut in the next two to three months has increased and might grow towards the consensus view in coming weeks.
1 December RBA policy decision – RBA.gov.au
2 February RBA policy decision – RBA.gov.au