Bill Evans, Research Analyst at Westpac, notes that the RBA Board kept the cash rate unchanged for a record 22nd consecutive meeting and has lowered its unemployment forecast to a level that from our perspective is still too high to expect any meaningful wage pressures.
Key Quotes
“There were a number of changes/ additions to the statement following the July meeting.”
“In today’s statement he asserts that the growth outlook “should see some further reduction in spare capacity”. This was borne out in the discussion on the labour market when he noted that the unemployment rate was likely to fall to around 5 per cent over the next couple of years.”
“The forecasts that will be updated in the August Statement on Monetary Policy which will be released on August 10 are now likely to include a forecast that the unemployment rate by end 2020 will be 5 per cent.”
“Our view, based on offshore evidence, is that the NAIRU in this cycle is likely to be below 5 per cent, so even with this new lower unemployment forecast, it still seems a big call to expect sustained upward pressures on wages growth.”
“In July, the Bank noted the increase in short-term wholesale interest rates over recent months. However, it provided little guidance as to the implications. “It remains to be seen the extent to which these factors persist”. Fortunately, that sentence has been deleted, but, still, no real guidance is provided in the current statement.”
“We would be surprised if the forecast for underlying inflation in either 2018 or 2019 is lifted in the August SOMP.”
“Conclusion
In his statement, the Governor does not provide a convincing commentary that wage pressures can be expected to lift; the housing slowdown and the associated wealth effect will not be headwinds for the economy; any evidence that inflation pressures are likely to build; and why global developments are not pointing to some challenges for Australia. Consequently we see no reason to be persuaded to change our view that rates will remain on hold.”
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