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 has been revised upwards. Growth in China supported by infrastructure spending and property construction but increased borrowing in China with growth composition pose medium term risks. Increased commodity prices boosting Australia’s national income but terms of trade still likely to decline over the period ahead.(Mild dovish bias)
• Headline inflation down recently reflecting lower oil price. Core inflation low, so is wage growth. 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 likely to go up further 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 be around 3 percent over the next couple of years. The Australian economy is continuing its transition following the end of the mining investment boom. Some large LNG projects now close to completion. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. Business conditions have improved and capacity utilization has increased. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending. (Neutral 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 a little over the next couple of years. Wage growth low and likely to continue like that for a while. (Neutral bias)
• The recent inflation numbers were as expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry. (Neutral 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 a slower pickup in economic activity and price pressure than the current forecast. (Mild dovish bias)
•  (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. Growth in housing debt outpacing slow growth in household income. Expects supervisory measures to help to address the issue. (Neutral Bias)
• Low-interest rates supporting the economy.

There have been minor tweaks in this month’s statement; it basically remains same in tone and neutral in terms of future bias.  However, it is mildly dovish in nature compared to the previous statement.

The Australian dollar little is changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.801 against the dollar.

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