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 “The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labor markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.”(Nothing new here, just statement, so, neutral bias)
• “Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar over recent months. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.” (Yet another statement, so neutral bias, however, it is interesting to note that RBA believes that higher rates are not sipping to retail clients”)
• “The Bank's central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 percent in 2018 and 2019. This should see some further reduction in spare capacity. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.” (Except for the household consumption part, RBA is more upbeat on the economy than before; so, neutral bias)
• “Australia's terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years.” (statement as to prior; neutral bias)
• “The outlook for the labor market remains positive. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. Employment growth continues to be faster than growth in the working-age population. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 percent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the 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 increased reports of skills shortages in some areas.” (here, RBA is more optimistic; hence, mild hawkish bias)
• “The latest inflation data were in line with the Bank's expectations. Over the past year, the CPI increased by 2.1 percent, and in underlying terms, inflation was close to 2 percent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1¾ percent. (RBA’s comments seem casual with regard to inflation, despite its forecast that inflation will be higher in coming years; hence; mild dovish bias)
• “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ percent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA's earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.” (again an old statement; hence, neutral bias)
• “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”

There have been very minor tweaks in this month’s statement; it basically remains the same in tone, which is neutral.  We expect RBA to maintain stance and keep policy unchanged in the second half of this year if inflation fails to rise above 2.3 percent.

The Australian dollar is little changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.742 against the dollar.