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 there was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labor markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected. (Neutral bias)
• Long-term bond yields have risen over the past six months, but are still low. Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States. Credit spreads have also widened a little, but remain low. Financial conditions generally remain expansionary. There has, however, been some tightening of conditions in US dollar short-term money markets, with US dollar short-term interest rates increasing for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia. (Mild dovish bias)
• According to RBA, The prices of a number of Australia's commodity exports have fallen recently, but remain within the ranges seen over the past year or so, however, RBA expects Australia’s terms of trade to decline over the next years but remain at high level.  (Neutral bias)
• The Bank's central forecast is for the Australian economy to grow faster in 2018 than it did in 2017 when it grew by 2.4 percent. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. Low level of household consumption remains a concern. Household incomes are growing slowly and debt levels are high. (Neutral bias)
• Employment has grown strongly over the past year, with employment rising in all states. The strong growth in employment has been accompanied by a significant rise in labor force participation, particularly by women and older Australians. The unemployment rate has declined over the past year but has been steady at around 5½ percent over the past six months. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labor market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills. (Neutral bias)
• Inflation remains low, with both CPI and underlying inflation running a little below 2 percent. Inflation is likely to remain low for some time, reflecting low growth in labor costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 percent in 2018. (Mild dovish 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)
• Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets. (Neutral Bias)
• Low-interest rates supporting the economy. RBA expects gradual progress in unemployment reduction and inflation pick up.

There have been minor tweaks in this month’s statement; it basically remains same in tone, however, it is slightly dovish tilted compared to the last statement.  We expect RBA to maintain stance and keep policy unchanged in the first half of this year and for the whole year if inflation fails to rise.

The Australian dollar is little changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.768 against the dollar.

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