RBA monetary policy: Assessing future bias

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

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

Key highlights –

• RBA notes that the global economic conditions have improved. Business and consumer confidence have picked up. Above trend growth expected in a number of advanced economies. China’s growth picked up in the second half of last year. This improvement is pushing commodity prices higher.(Hawkish bias)
• RBA acknowledged the recent rise in inflation reflecting higher prices of commodities as well as an increase in long-term bond yields. No further expectations of easing in major economies.(Hawkish bias)
• Financial markets functioning effectively. (Neutral Bias)
• The Australian economy is continuing its transition from the post-mining boom. September GHDP was weak and below expectations but likely to be temporary and December is going to be better.(Neutral bias)
• The Bank's central scenario remains for economic growth to be around 3 per cent over the next couple of years. Consumption growth will be supportive. Pick up in non-mining business expected. Mining investment decline coming to an end. (Mild hawkish bias)
• Low-interest rates supporting economy and banks are in a position to lend for worthwhile purposes. Warns against stronger Aussie.(Neutral bias)
• Labour market and improvement continues. The Labor market is giving mixed signals but employment expansion likely. There are considerable variations in employment across the country.(Neutral bias)
• Inflation is quite low and likely to remain so, however, likely to pick up over the course of 2017. Likely to reach above 2 percent.(Mild Hawkish bias)
• RBA seems to be less worried of the risks from rising house prices and considered supervisory measures effective. Acknowledges variation in prices across the country. It said that some banks are taking additional caution. It however, acknowledges both decline and rise in prices in different areas but confident over upcoming supply. (Neutral Bias)
• Growth in rents slowest in some decades. (Neutral bias)
• RBA considers the current monetary policy stance prudent especially after easing in 2016. (Neutral bias)

There have been considerable changes in the monetary policy statement, especially with regard to growth and commodity prices. RBA seems to be turning hawkish but gradually. The central bank is not likely to ease further but would be very patient when it comes to hiking rates. Rate hikes are unlikely before next year.

The Australian dollar has gained lots of grounds in recent days and we expect the currency to rise further.  The Aussie is currently trading at 0.768 against the dollar.