Analysts at Nomura explained that as uniformly expected, the Reserve Bank of Australia (RBA) again left its cash rate unchanged at 1.50%, extending the current period of stability to a full two years. It also gave no clear policy bias, repeating that it expects to achieve its growth and inflation objectives, over time, based on current policy settings.
Key Quotes:
“In terms of the detail of its press release and new thoughts, we see more softer than stronger observations, notably around China, housing, the drought and near-term headline CPI inflation.”
“Market reaction to today’s press release was extremely muted. We continue to pencil in two 25bp rate hikes in 2019, though again flag relatively low conviction here, given global and regional risks and our expectation that funding pressures will re-emerge closer to 30 September, year-end for three of Australia’s Big 4 banks.”
On global growth, the governor repeated that “the global economic expansion is continuing”. The comment on China was softened from “continues to grow solidly” to “has slowed a little”. As a partial offset, the prior comment around “strains in a few emerging markets” was removed;
Statement highlights
- On financial conditions, the governor repeated that these “remain expansionary”. However, we were given no detail as to his view on whether funding pressures are likely to grow or recede. We strongly suspect he will be asked about this in his speech tomorrow on Demographic Change and Recent Monetary Policy and we should see some detailed thoughts in Friday’s Quarterly Statement on Monetary Policy (SOMP);
- AUD, commodity prices and the terms of trade – comments here were unchanged; the RBA continues to anticipate some decline in the terms of trade over time, although to a still-healthy level and seems quite relaxed about the level of AUD;
- Domestic growth – the governor indicated the bank’s GDP profile was unchanged; accordingly, we expect to see a minimal revision to its GDP forecasts on Friday;
- Labour market – the governor also repeated that “the outlook for the labour market remains positive”. On the upside, he did note the unemployment rate could fall to “around 5%” over the next couple of years, lower than its current mid-2020 forecast of 5.25%;
- Wages and inflation – the broad message, of a likely slow grind higher, was unchanged. The governor did note that the Q3 CPI headline inflation could print around a lower 1.75% y-o-y;
- Housing comments looked a little softer, also as expected, with the governor noting that conditions in Sydney and Melbourne were “continuing to ease”, and with the annual pace of credit growth slowing a little.
On balance, new thoughts tilting a little softer
“Regarding Friday’s quarterly statement and revised forecasts, today’s press release suggests an unchanged GDP profile, slightly lower near-term headline CPI and perhaps a lower unemployment rate forecast of 5.0% for end-2020.”
“We maintain a higher conviction for curve steepening. Finally, we continue to see AUD as being close to fair value at AUD/USD 0.74, noting longerterm downside risks from possible lower bulk commodity prices, amid worsening growth prospects in China (despite more policy stimulus) and rising commodity supply, but with the investment community holding large short positions in AUD (and NZD) at present.”
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