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 labour markets tightened in many countries and growth forecast has been revised upwards. Growth in China supported by infrastructure spending and property construction but high levels of debt in China pose medium-term risks. Increased commodity prices boosting Australia’s national income but terms of trade still likely to decline over the period ahead.(Neutral bias)
• Headline inflation down recently reflecting lower oil price. Core inflation low, so is wage growth. Interest rates have increased and fed signalled balance sheet reduction 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)
• Data has been in line with RBA’s expectation that growth will pick up gradually. Growth was 0.8 percent in the June quarter. Over recent months there have been more consistent signs that non-mining business investment is picking up and consolidation of this trend would be a welcome development. Business conditions as reported in surveys are at a high level and capacity utilization has risen. A large pipeline of infrastructure investment is also supporting the outlook, although slow growth in real wages and high levels of household debt are likely to constrain future growth in spending. (Mild hawkish 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 though stronger conditions in the labour market should lift wages somewhat over time. Inflation also low, likely to pick up gradually as economy recovers. (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 pick-up in economic activity and price pressure than the current forecast. (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 Sydney, where the price increased rapidly, showing signs of moderation. 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 a minor tweaks in this month’s statement; it basically remains same in tone and neutral in terms of future bias. It has turned only mildly hawkish.  We expect RBA to maintain stance and keep policy unchanged this year and in the first quarter of next year.

The Australian dollar is little changed largely due to the neutrality in the monetary policy statement. The Australian dollar is currently trading at 0.781 against the dollar.

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