RBA: Cash rate on hold, no surprises in the Governor’s Statement – Westpac

Bill Evans, Research Analyst at Westpac, points out that the RBA decided to leave the cash rate at 1.50% and remains cautious around the outlook for the consumer while retaining a conservative unemployment forecast.

Key Quotes

“There were two issues that we thought might change in this Statement, particularly if the Governor had decided to be more upbeat in his commentary.”

“The first one was whether he would continue to describe the outlook for household consumption as “a continuing source of uncertainty”. This description was used in the September Statement but was dropped from the Minutes of that meeting. However, the comment has been repeated in today’s Statement.”

“Secondly, we remain perplexed as to why the Bank can be optimistic about a lift in wages growth when it is only forecasting that the unemployment rate will fall from the current 5.3% to 5.0% by mid-2020. It was possible that, particularly following the upbeat employment report for August, the Governor may choose to indicate a lower target for the unemployment rate than the 5.0% that has been used in recent Statements. This was not the case and the 5.0% forecast has been retained. Of course, it remains a possibility that this forecast will be lowered in November with the release of the next Statement on Monetary Policy.”

“Conclusion

The final paragraph in the Governor’s Statement is identical to the Statement in September, emphasising that progress in reducing unemployment and returning inflation to the target is likely to be gradual.

While markets appear to be pricing in around a 40% probability of a rate hike by end 2019, we remain comfortable with our forecast that rates will remain on hold through 2019 and 2020.”