Rates Remain Unchanged at 1.5%
In line with market expectations, the Reserve Bank of Australia kept their headline policy rate unchanged at record lows of 1.5% in February. The bank has now maintained this rate for six months.
One of the notable changes made to the statement was in comments aligned to the global economy. The bank judged that conditions have improved over recent months, seeing a pickup in both business and consumer confidence. The bank also noted a pickup in headline inflation rates in many economies. However, despite this, the bank still noted that “uncertainties remain” in the global outlook.
Growth & Inflation
Regarding the domestic outlook, the bank’s view was mostly unchanged. The RBA still anticipated GDP growth returning to “around 3% over the next couple of years” with Q3 GDP weakness “largely reflecting temporary factors”.
Regarding inflation, the next forecasts, which will be released on Friday, are “little changed”. Headline inflation is forecast to pick up above 2% in 2017 though the rebound in underlying inflation is expected to be more gradual.
Regarding the labour market, the RBA noted that concerns remain as recent data continues to be mixed. The RBA is encouraged by the pickup in full-time employment but left disappointed by the increase in the unemployment rate. Overall though the bank still expected employment to increase over the coming period.
On housing, the bank’s comments were slightly more wary. The RBA reiterated their comments around house prices, noting that prices were still rising quickly due to “stronger demand by investors” and increasing leverage. The bank also continues to show concern for the impact that the large increases in apartment buildings will have on rents and on overall inflation, noting that rental growth is “the slowest for a couple of decades”.
Persistently low inflation remains an issue for the RBA. As the bank presently only has the mid-point of its underlying inflation forecasts returning to their target band over the forecast period it seems likely that they will maintain an easing bias. However, the mild improvement in global dynamics, despite heightened political risk, as well as the boost to national income from higher commodity prices and the risks posed by house prices, suggests that the RBA are unlikely to act on this bias.
However, the inflation outlook is likely to prevent the bank from reversing its policy course anytime soon. The Q4 inflation report reflected muted inflationary pressures, and although it appears that wage growth has bottomed, there isn’t yet any decent indication of a meaningful pickup happening in the short term.
This, in conjunction with continued strong retail competition and slowing rental growth, suggests that any pickup in inflation over the next couple of years is likely to be very modest. As such, the cash rate is likely to remain unchanged over 2017. Indeed, OIS based pricing ahead of the meeting saw just a 25% chance of a cut by August and a 28% chance of a cut by the end of the year. That pricing is now down to 14% and 28% respectively.
Regarding the exchange rate, the RBA kept the phrasing that “the depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment”. So, the warning is still there that any material strengthening in the AUD would challenge the bank’s outlook and would therefore likely see them forced to act again.
AUDUSD sold off in response to the meeting, which was perhaps not as bullish as some AUD players were expecting. For now, AUDUSD remains near the resistance trend line of a broad contracting triangle pattern. The level also holds confluence with a retest of the broken bullish trend line from early 2016 as well as a retest of the November 2016 high.