Key Notes from The Statement
As was widely expected, the RBA kept rates on hold at their July meeting. The tone of the meeting remained roughly neutral with a policy outlook identical to that of June, with the bank concluding that “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
The bank also reaffirmed its constructive view on the global environment repeating that “the broad-based pickup in the global economy is continuing” and “labour markets have tightened further”. However, the bank did note that inflation had “declined recently in response to lower oil prices” and that “wage growth remained subdued in most countries”.
Growth Still Expected to Pickup
On the domestic front the bank downplayed Q1 GDP saying, “as expected, GDP growth slowed in the March quarter, partly reflecting temporary factors”. However, the bank did note that the “economy is expected to strengthen gradually”, but abandoned the specific reference to 3%, used previously. This slight change suggests that the RBA could downgrade their growth outlook at the August SOMP after the May SOMP forecast GDP to rise at its fastest level since before the global financial crisis.
On currency strength, the RBA again stuck to the view that “an appreciating exchange would complicate “the economy’s adjustment. Referring to domestic inflation again the bank’s view was unchanged from June saying that “inflation is expected to increase gradually as the economy strengthens”.
Labour Market Remains Mixed
Referring to the labour market the bank noted that conditions “remain mixed” as “employment has been stronger over recent month” but” wage growth remains low” and “is likely to continue for a while yet”. This is reflected by the recent record low Q1 wage growth data which showed earnings dropped to flat year over year. As with last time, the RBA tied low wages in with spending, but also referred to the impact of debt this time, saying that “consumption growth remains subdued reflecting slow growth in real wages and high levels of household debt”.
Housing Conditions Remain Varied
Referring to the housing market, the bank repeated that “conditions… continue to vary considerably” and “there are some signs that these conditions are starting to ease”. The bank also said that although” housing debt has outpaced the slow growth in household incomes”, they “already responded” as “recent supervisory measures should help address the risks associated with the high and rising level of indebtedness”. Furthermore, the bank again highlighted that “lenders have also announced increases in mortgage rates for investor and interest-only loans”.
There was little change between the June and July policy outlook as the bank reaffirmed their neutral stance, highlighting an improving global picture, supporting firmer domestic growth and higher inflation. Despite the Q1 GDP miss, the RBA still expected better growth ahead though have put aside their “3% outlook”.
Looking ahead the bank is likely to retain this neutral stance as they wait to assess the impact of their recent macroprudential policy tightening”. The key markers will be the upcoming Q2 GDP print as well as the bank’s next GDP forecast at the August SOMP.
Given the recent uptick in hawkishness by the Fed, ECB, BOE & BOC, it is clear that investors were anticipating a similar shift in tone by the RBA and reacted with disappointment to a broadly unchanged statement.
AUDUSD recently made its way back up to test the longer term bearish trendline from mid-2015 where it found resistance and has since turned lower. AUD longs had recently been built up again, according to the latest positioning update, so we are seeing some position squaring here. The rising trend line from the December lows is the key support on watch with the structural point at the mid may high (.7518) also on the radar.