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 continued to improve. Global trade and industrial production have picked up. Above trend growth expected in a number of advanced economies. China’s growth supported by spending in infrastructures and property construction. Increased borrowing in China with growth composition pose medium-term risks. This improvement is pushing commodity prices higher, thus boosting Australia’s national income.(Neutral bias)
• Headline inflation moved higher in most countries, partly reflecting the higher commodity prices. Core inflation low. Long-term bond yields are higher than last year but in historical context, they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.  (Neutral bias)
• The Australian economy is continuing its transition following the end of the mining investment boom. Recent data are consistent with ongoing moderate growth. Most measures of business confidence are at, or above, average and non-mining business investment is up over the past year. (Mild hawkish bias)
• Some indicators of the labor market have softened recently. The unemployment rate has moved higher and employment growth is modest. Various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow. (Mild dovish bias)
• Low-interest rates supporting economy and banks are in a position to lend for worthwhile purposes. Warns against stronger Aussie.(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 but rise likely to be gradual. (Neutral bias)
• Conditions in the housing market vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades. (Neutral Bias)
• Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development. (Regulatory hawkish bias)

There have been some changes in the monetary policy statement; the amounts of information given out from the policy statement were increased, however, it basically remains neutral in terms of future bias. Additional sentences were used to address the housing sector and loans.

The Australian dollar has suffered a setback on the policy announcement due to the lack of hawkish bias in the statement. The Australian dollar is currently trading at 0.755 against the USD.