RBA leaves cash rate on hold at 1.5 pct, but retains easing bias

As widely projected, the Reserve Bank of Australia left its cash rate on hold today at 1.5 percent after it lowered the key rate by 25 basis points in both May and August. The overall tone of the statement was widely similar to that of the September statement. It mentioned that conditions are uneven and that inflation continues to be low. The central bank’s statement about a signal on near-term rates was open.

One of the interesting comments was that inflation continues to be below most central banks’ targets. The central bank seems to be underlining that inflation is a global phenomenon, said St George Economics in a research note. The statement might be stressing that Australia’s 2 percent – 3 percent per annum inflation target rate is flexible.

Meanwhile, the RBA continued to be quite wary regarding economic conditions. Australia’s economic growth was accelerating at a moderate pace. Public demand, residential construction and exports were positives. The statement was quite downbeat on household consumption that seems to have decelerated slightly in recent times.

The Australian labor market continued to be “mixed”, recognizing that the jobless rate had dropped; however there were significant variations in employment growth throughout Australia, noted St George Economics. The central bank continued to be quite positive about the housing market, stating that the growth in lending has decelerated and turnover has dropped.

The RBA retains an easing bias. Today’s statement implies that monetary policy will be on hold for the time being as the central bank measures the impact of the rate cuts in May and August, said ANZ in a research note. The easing bias was quite clear in Governor Lowe’s recent parliamentary testimony where he stated that “certainly there are scenarios where rates would fall again and there are scenarios where they would not need to fall again”, added ANZ. This easing bias is supported by the RBA’s projections, which have underlying inflation staying below 2.5 percent midpoint of the target band for a longer period and the recent sustained drop in inflation expectations.

On the currency front, the RBA stated that the lower exchange rate since 2013 had been aiding the traded sector. It maintained its concern that a strengthening AUD might complicate this.

The Reserve Bank of Australia has repeatedly highlighted flexibility around the inflation target band of 2 percent – 3 percent in recent months. This might imply that the central bank is not of a mind to excessively cut rates even if the headline inflation is at an annual rate of 1 percent and underlying inflation remains at 1.5 percent.

“We continue to have doubts that inflation would feasibly return to its target anytime soon, and may not occur until the end of 2017, at the earliest”, noted St George Economics.

Acceleration in inflation might possibly need additional reduction in the jobless rate, a rebound in wages and a sustained period of above trend economic growth. Global conditions also continued to be favorable to quite low inflation environment. The global conditions might compel the Australian central bank to cut rates further. There is possibility that the RBA will cut rates to as low as 1 percent by mid-2017, according to St George Economics. However, the timing to when the central bank would cut rates is uncertain.