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RBA monetary policy: Assessing future bias

Reserve Bank of Australia (RBA) chose to keep the interest rate unchanged at 1.5 percent at today’s policy meeting.

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 and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions. 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 due to the earlier lift in oil prices and faster wages growth. A further pick-up in core inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus.”(Nothing new here, just similar as the last statement, so, neutral bias)
  • “Financial conditions in the advanced economies remain expansionary but have tightened somewhat. Equity prices have declined and credit spreads have moved a little higher. There has also been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates have declined, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.” (Yet another similar statement, so neutral bias”)
  • “The Australian economy is performing well. The central scenario is for GDP growth to average around 3½ percent over this year and next, before slowing in 2020 due to slower growth in exports of resources. Business conditions are positive and non-mining business investment is expected 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. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector.” (Except for the household consumption and farm draught part, RBA is more upbeat on the economy than before; so, mild hawkish bias)
  • “Australia's terms of trade have increased over the past couple of years and have been stronger than earlier expected. This has helped boost national income. Most commodity prices have, however, declined recently, with oil prices falling significantly. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis.” (statement as prior; neutral bias)
  • “The outlook for the labour market remains positive. The unemployment rate is 5 per cent, the lowest in six years. With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.” (Statement same as prior; hence, neutral bias)
  • “Inflation remains low and stable. Over the past year, CPI inflation was 1.9 percent and in underlying terms, inflation was 1¾ percent. Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual. The central scenario is for inflation to be 2¼ percent in 2019 and a bit higher in the following year.” (RBA not so upbeat on inflation; dovish bias)
  • “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend. The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualized pace of 5–6 percent. Mortgage rates remain low, with competition strongest 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 same in tone, which is neutral.  We expect RBA to maintain stance and keep policy unchanged in the first half of next year if inflation fails to rise above 2.6 percent.

The Australian dollar is little changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.738 against the dollar.

 

 

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