RBA monetary policy: Assessing future bias

Reserve Bank of Australia (RBA) maintained its monetary policy stance at today’s meeting and kept interest rates steady at 1.75%.

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

Key highlights –

• RBA notes that global economy is growing but now at much slower pace than earlier noted. Growth has been forecasted down recently. Acknowledged improvement in advanced economies and deteriorating conditions weakness in emerging market economies. RBA considered China to be growing moderately. Chinese recent fiscal actions supporting growth in near term.(Neutral bias)
• RBA acknowledged  a recent rise in commodities prices but notes that it is much lower compared to years back, so terms of trade is weaker for Australia. (Neutral bias)
• Financial market volatility have improved, however, uncertainty remains and monetary policy globally remains very accommodative. (Neutral) (Neutral bias)
• Despite weakness in mining investment, the economy picked up along labour market and improvement continues. Labour market recently giving mixed signals. (Neutral) (Neutral bias)
• Exports expanding at above-trend pace. (Mild Hawkish)
• Inflation low and likely to remain so, labour cost subdued. (Neutral).
• RBA seems to be less worried on the risks from rising house prices and considered supervisory measures effective. It said that some banks are taking additional caution. It, however ,acknowledges a recent rise in prices but confident over upcoming supply. ( Mild Dovish)
• RBA expressed worries over  the recent strength of Australian Dollar as it could derail rebalancing, which has been helped so far by low-interest rate, credit to the business sector.(Mild dovish)
• RBA considers with current monetary policy stance, growth and inflation outlook will be helped.

Compared to the previous policy statement, this is relatively tilted to the hawkish side, which indicates that RBA may not be in a hurry to reduce rates further.

Naturally Aussie rose sharply after the announcement, up 0.9% so far today, trading at 0.744 against Dollar.

However, we expect RBA to reduce rates by at least another 25 basis points over next three-quarters.