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. Australia’s terms of trade improvement, though there is some reversal on the way.(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)
• RBA expects growth to increase gradually over the next couple of years to little above 3 percent. The Australian economy is continuing its transition following the end of the mining investment boom. Consumption growth to remain moderate and non-mining investments low as a share of GDP. A stronger pickup there would be welcomed. (Mild dovish bias)
• Labor market indicators remain mixed. The unemployment rate has moved higher and employment growth is slightly stronger. Various forward-looking indicators still point to continued growth in employment over the period ahead and the unemployment rate would decline gradually over time. Wage growth remains slow and is likely to remain such. (Mild dovish bias)
• Low-interest rates supporting economy and banks recently increased mortgage lending rates. Warns against stronger Aussie.(Neutral bias)
• Inflation picked up to reach 2 percent in the March quarter. In underlying terms, inflation is around 1.75 percent and RBA expects a gradual increase as the economy strengthens. (Mild hawkish 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. Growth in housing debt outpacing slow growth in household income. Expects supervisory measures to help to address the issue. (Neutral 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 for explanations in greater details.

The Australian dollar has found a minor boost as the neutral bias with regard to inflation moved towards mild hawkish. The Aussie is currently trading at 0.754 against the dollar.