Felicity Emmett, Head of Australian Economics at ANZ, notes that not surprisingly, the RBA left the cash rate unchanged at 2% at its board meeting today.
Key Quotes
“There was little change to the tone of the Bank’s narrative in the post-meeting statement, although some small tweaks to the language suggest to us a slightly more dovish tilt. Overall though the Bank retains its easing bias and is focused on the flow of data on both activity and inflation. As has been the case for some time, it remains ready to cut rates if necessary.
• On the international economy, the RBA remains cognisant of the risks to the outlook, especially for emerging markets and is closely watching the interplay between financial markets and the real economy.
• Those looking for some jawboning on the AUD would have been disappointed, with the wording around the exchange rate only a little changed with the Bank now noting that the exchange rate has “been adjusting” rather than “continued its adjustment”.
• On the domestic economy the Bank once again noted the improvement in activity and the labour market in late 2015, and repeated that inflation would likely remain low. Last week’s fresh record low in wages growth would have left the Bank more convinced of this.
• There was a small change to the wording in the final paragraph which could be significant. The RBA noted that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand” rather than “may provide scope”. Perhaps there is nothing in this, but tweaks in the language, especially in the last paragraph, are likely to be very carefully considered. So we are reluctant to completely discount this change.
Looking forward, the RBA is likely to be watching the global data to determine whether the recent financial market volatility has presaged real weakness in the economic outlook. Domestically, the labour market data are always important, and after a significant downgrade to the RBA’s unemployment forecasts in February a stabilisation at 6% would effectively be a disappointment. Activity indicators like business conditions and retail sales will also be important to determine the path of monetary policy.
The behaviour of the property market will also be an important input into the Bank’s deliberations over the next few months. The housing market has got off to a surprisingly good start in 2016, with Sydney’s auction clearance rate jumping back to around 75% in February. A second wind for the frothy Sydney market is not something that the Bank would have been counting on and if sustained raises the hurdle for further monetary policy easing.
We still believe that softer demand and low inflation will see the Bank provide some further monetary stimulus this year. For some time we have had 25bp cuts pencilled in for May and August. The risks are tilted towards a later move, but if the improvement in the unemployment rate stalls we expect the RBA will feel uncomfortable sitting pat with inflation at the low end of the target band.”
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