As expected the Reserve Bank sat on monetary policy yesterday, despite some urgers in the commentary class trying to suggest the central bank might start getting “hawkish” about policy and follow the Bank of England, the European Central Bank and especially the US Federal Reserve.
Nothing was further from the tone of yesterday’s post meeting statement from Governor, Phil Lowe (https://www.rba.gov.au/media-releases/2017/mr-17-13.html) as the bank left the cash rate at 1.50% with no hint of when that might change.
In fact the claims the bank might join offshore central banks in making a switch to a more ‘hawkish stance’ was talk coming from the market and not rooted in reality. Some media economists joined in the hunt and were left with egg on their faces.
That misplaced market belief had helped the Aussie dollar up toward 77 US cents and kept it close on Monday and yesterday morning. Yesterday afternoon it fell back towards 76 US cents after it became clear the RBA would not be saying anything stupid.
The RBA again made clear the economy was going OK – not brilliantly, but better than earlier in the year with jobs market more solid (see separate story), inflation under control and consumption growing.
On the jobs market, Dr Lower repeated comments from the June statement:
"Indicators of the labour market remain mixed. Employment growth has been stronger over recent months. The various forward-looking indicators point to continued growth in employment over the period ahead.”
The Bank saw no need to change its policy stance – highly accommodative with rates at record lows and let the private banks take car of housing by lifting investor and interest only rates.
“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."
But low wages growth remains the biggest problem with a couple of references in the statement.
“At the same time, consumption growth remains subdued, reflecting slow growth in real wages and high levels of household debt,” and “Wage growth remains low, however, and this is likely to continue for a while yet.”
While building approvals again showed their month to month volatility in may with a sharp fall in total approvals thanks to a big drop in apartment approvals (especially in NSW), retail sales for May rose 0.6% (seasonally adjusted) after the shock 1% rise in April (which was unrevised in yesterday’s release).
The AMP’s Chief Economist, Dr Shane Oliver said in a note late yesterday that “Our view remains that the RBA will be on hold for the next year at least, with risks around the consumer and a housing slowdown preventing hikes but a fading in the drag from the mining investment slump and solid employment growth heading off cuts.
“Around our base case, for the next year we still see more risk of a cut than a hike but by late 2018 and 2019 the risks are likely to swing towards a hike,” he added.
And Capital Economics agrees
"All told, while the RBA remains upbeat on the economic situation we don’t think this means that interest rate hikes are imminent. Indeed, the issue of persistently low underlying inflation is likely to prevent the RBA from beginning to hike rates until 2019,” the group said yesterday.
