RBA: “The Board is certain to keep the cash rate on hold” – Westpac

Bill Evans, an analyst at Westpac Banking Corporation explained that The Reserve Bank Board next meets today.  

Key Quotes:

“The Board is certain to keep the cash rate on hold.”

“The last move in the cash rate was a 25 basis point cut in August 2016; that followed a 25 basis point cut in May of that year.”

“As usual during this long period of inactivity our primary interest has not been in the outcome of the meeting but the commentary both in the Governor’s Statement and the minutes of each of the meetings.

In the minutes of the September meeting there was the following commentary on the housing market: “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5 ½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets.”

This describes what is happening and in this note we look forward as to how this theme might play out.”

“Those rate cuts in 2016 were on the watch of Governor Stevens. Bear in mind that the current Governor (who was Deputy Governor when his predecessor Glenn Stevens cut rates in May and August 2016) seems to have a somewhat different set of priorities to Stevens.”

“At an ECB Forum on Central Banking in Portugal in June Governor Lowe noted: “I remain confident we’re going to get (inflation) back to 2.5 per cent, it’s just going to take us a bit of time “¦. To try to get it back to 2.5 very quickly, it would be mainly through people borrowing more money, and having higher asset prices – I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations.””

“He went on to note that “very high” debt levels and asset prices are the No. 1 domestic risk in Australia.”

“To put that issue in perspective, the chart below shows that headline inflation in Australia, on a calendar year basis, has printed below the 2% lower bound of the inflation target zone for the last four years (2014-17) with the Reserve Bank itself forecasting 1.75% for 2018.”