RBA keeps rates on hold – Westpac

Bill Evans, Research Analyst at Westpac, points out that the Reserve Bank of Australia has kept rates on hold but has lifted its growth forecast and lowered unemployment forecast for the Australian economy.

Key Quotes

“As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.”

The themes that have become familiar in previous statements were repeated in this one: continuing global expansion; China slowing a little; international trade uncertainty; positive business conditions; household consumption a source of uncertainty; labour market outlook positive; wages growth low; but a gradual lift in wages growth expected; further gradual decline in the unemployment rate expected; inflation higher in 2019 and 2020; housing conditions in Sydney and Melbourne continue to ease; progress toward full employment and target inflation will be gradual.”

“However, the growth and unemployment forecasts have been revised. These forecasts will be confirmed in the Statement on Monetary Policy that will be released on November 9. The forecast growth rates for 2018 and 2019 have been revised up from 3 ¼ per cent to 3 ½ per cent, while the 2020 forecast is for a slowdown, although the current forecast of 3 per cent may now be revised up to 3 ¼ per cent. With no real change in the wording, there is no clear justification for this upward revision, particularly for the faster expected growth in 2019.”

“Conclusion

As discussed, we are a little surprised that the Bank has decided to lift its growth forecast in 2019 to 3 ½ per cent ( ¾ per cent above estimates of potential growth). Westpac expects growth to slow to 2.7% in 2019 (around potential). We will have to wait until the Statement on Monetary Policy on November 9 for an explanation behind this lift.

Clearly, the Bank is less concerned about the headwinds that we have outlined above. As always, while policy is forward looking, it responds to reality rather than long-term forecasts. We expect that through 2019, the Bank will be surprised about the slowdown in the Australian economy and adjust its outlook accordingly. As such, we remain comfortable with our forecast that the cash rate will remain on hold in 2019 and, indeed, in  2020.”