RBA monetary policy: Assessing future bias

Reserve Bank of Australia (RBA) chose to keep the interest rate unchanged at 1.5 percent.

Let’s look at the details of policy announcement to assess the bias of RBA.

Key highlights –

• RBA notes that global economic conditions improved in 2017 and labor markets have tightened in many countries and growth forecast expected upwards. Growth in China supported by infrastructure spending and property construction but lending conditions have tightened as authorities address the medium term risks from high levels of debt. Terms of trade still likely to decline over the period ahead but to remain at high levels.(Neutral bias)
• In most countries, core inflation low, so is wage growth. In a number of economies, there has been a withdrawal of monetary stimulus, although financial conditions remain quite expansionary. Equity market strong, Spreads have narrowed, long-term yields low, and volatility remains low.  (Neutral bias)
• Recent data suggests at around its trend of the September quarter. Growth is expected to be around 3 percent over the next few years. Business conditions at a high level and capacity utilization have risen. The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the outlook. Low level of household consumption remains a concern. Household incomes are growing slowly and debt levels are high. (Neutral bias)
• Employment growth has been stronger, and employment increased in all states. Various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth low though stronger conditions in the labor market should lift wages somewhat over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills. (Neutral bias)
• Inflation is low, likely to pick up gradually as economy recovers. (Neutral bias)
• The Australian dollar is trading within a range for the past two years. Stronger Aussie likely to lead to a slower pick-up in economic activity and price pressure than the current forecast. (Neutral bias)
•  Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Housing market conditions have eased further in Sydney. In most cities, housing prices have shown little change over last six months. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. (Neutral Bias)
• Low-interest rates supporting the economy.

There have been minor tweaks in this month’s statement; it basically remains same in tone and neutral in terms of future bias.  We expect RBA to maintain stance and keep policy unchanged this year and in the first half of next year.

The Australian dollar is little changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.764 against the dollar.

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