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 pickup in global recovery continuing and labor markets tightened in many countries and growth forecast expected upwards. Growth in China supported by infrastructure spending and property construction but high levels of debt in China pose medium-term risks. Increased commodity prices boosting Australia’s national income but terms of trade still likely to decline over the period ahead but remain at high levels.(Neutral bias)
   
• Headline inflation down recently reflecting lower oil price. Core inflation low, so is wage growth. Interest rates have increased and fed has begun balance sheet reduction in the United States and the interest rates likely to go up further and there is no longer an expectation of additional monetary easing in other major economies. The monetary accommodation has turned less accommodative. Equity market strong, Spreads have narrowed and volatility remains low.  (Neutral bias)
   
• Data has been in line with RBA’s expectation that the growth will pick up gradually. Growth is expected to be around 3 percent over the next few years. Business conditions at a high level and capacity utilization has 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, although slow growth in real wages and high levels of household debt remain a source of concern. (Mild hawkish 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 and the unemployment rate would decline from the current 5.5 percent over the next couple of years. Wage growth low though stronger conditions in the labor market should lift wages somewhat over time. (Neutral bias)
   
• Inflation also low, likely to pick up gradually as economy recovers. Both headline CPI and underlying inflation is running below 2 percent and likely to remain low reflecting low pressure on wages and increased competitive pressure in retailing. CPI inflation is being boosted by higher prices for tobacco and electricity. (Mild dovish bias)
   
• The Australian dollar appreciated recently on the back of a weaker dollar. Stronger Aussie likely to contribute to subdued price pressure and weighing on the outlook for output and employment. It is likely to lead to 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 recent months, although they are still increasing in Melbourne. 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 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 quarter 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 0.768 against the dollar.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest