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- The RBA has now left interest rates steady for a record-equaling 19 months.
- Many economists expect policy inertia will continue until later this year at the earliest.
- The RBA appears a little less confident about the outlook for economic growth this year.
The Reserve Bank of Australia (RBA) hasn’t increased interest rate since late 2010, and hadn’t moved the cash rate in any direction in each of the past 19 months.
Given the tone of its March monetary policy statement released today, Australia’s record-breaking run of interest rate inertia looks like it will continue for some time yet.
It was largely identical to what has been heard countless times before, described by one strategist at a “control-V, control-P” statement.
However, that’s not to say that there wasn’t anything new.
There was.
For one, the RBA expressed confidence that Australian wage growth has now turned the corner, something that it expects will eventually help to “gradually” boost inflationary pressures, eventually allowing the bank to begin normalising interest rates.
However, with Australian unemployment currently sitting at 5.5% — well above the sub-5% level many believe it will need to fall to in order to boost wage pressures — it appears unlikely that point will arrive in the coming quarters.
Secondly, and again creating doubt as to just how quickly wage pressures will build, the RBA also appears to be less confident about the outlook for economic growth this year.
It expects the Australian economy to grow “faster in 2018 than it did in 2017”, a noticeable change from just one month ago when it said growth was expected to “average a bit above 3% over the next couple of years”.
Reading through the central bank lingo, it suggests the RBA is a little less confident that the economy will grow above 3% this year, an outcome that will likely have ramifications for employment growth and progress in lowering unemployment.
In an otherwise largely unchanged policy statement, these two changes stood out, underlining just how much uncertainty there is as to when wage pressures will accelerate.
Financial markets certainly took some notice, partially reversing earlier gains in the Australian dollar and Australian 3-year government bond yields.
Now it’s time to see what economists have made of the March statement.
Are financial markets reacting on semantics in the absence of any other meaningful changes, or has the outlook for wage growth just become a little less clear?
Let’s find out.
Bill Evans, Westpac Bank
While we expected [the interest rate] result, we were not expecting any significant surprises in the Governor’s Statement. We were wrong.
Readers will be aware that Westpac has been consistently critical of the RBA’s GDP growth forecasts for 2018 and 2019 of 3.25% in both years.
We have consistently argued that the number will be more in line with 2.5%. In all recent statements, the Governor has noted “the Bank’s central forecast for the Australian economy is for GDP growth to pick up to average a bit over 3% over the next couple of years”. In today’s statement, he notes “the Bank’s central forecast is for the Australian economy to grow faster in 2018 than it did in 2017”.
While this change in the attitude to growth appears to be somewhat more dovish, the Bank does show some more confidence about wages. The Governor points out that “the rate of wage growth appears to have troughed”. This is an upgrade from the wages commentary in previous statements. The facts are of course that annual wages growth lifted in the December quarter from 2.0% in the September quarter to 2.1%.
The Reserve Bank appears to be less confident about the growth outlook. Nevertheless, we still believe that it expects to be raising interest rates beginning sometime in late 2018 and into 2019. That would be in line with current market pricing.
In contrast, Westpac is not surprised to see the Bank more cautious on the growth outlook and we continue to expect that the cash rate will remain on hold in 2018 and 2019.
Ben Jarman, JP Morgan
Of the few tweaks, the most significant is that the commentary on growth is now more vague, not surprisingly on the basis of recent activity data and a soft tracking estimate for tomorrow’s GDP result.
In February, the commentary stated the central forecast was for “GDP growth to pick up, to average a bit above 3% over the next couple of years.” Now, the Governor states that the economy will “grow faster in 2018 than it did in 2017”.
This is a lot less challenging given that on consensus estimates 2017 growth will finish at 2.5%, and a weaker Q4 makes annual comparisons for 2018 a little easier.
It also suggests officials are already backing away a little from the February Statement on Monetary Policy (SoMP) forecast of year-on-year growth at 3.25% at end-2018. The export side will have to deliver very consistently over the next four quarters to deliver this, given that trends in consumption and capex are more slowly-evolving, and both are falling short at the moment.
Today’s statement only edges slightly toward a possible re-think of the RBA’s growth forecasts in May.
Felicity Emmett and Giulia Lavinia Specchia, ANZ Bank
Of the few changes to the statement, we found the comments around the GDP outlook as the most interesting, with the RBA seemingly downplaying its expectations for 2018 growth.
While the statement notes that “non-mining business investment is increasing” and “higher levels of public infrastructure investment are also supporting the economy”, expectations for growth seem to be slightly more circumspect.
On the labour market, the RBA noted that “the rate of wage growth appears to have troughed”. While this is a change from previous language, in our view it is more a stating of facts than a change to the outlook, with annual wage growth on a WPI basis having troughed in late-2016/early-2017.
The RBA seems to be more comfortable with the risks around housing, but still alert to them. The language around housing dynamics was changed slightly, suggesting that the Bank perceives macroprudential measures as having run their course. The statement notes that “APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high”.
We imagine that the RBA will be watching house price and housing debt data quite closely over coming months, given the apparent stabilisation in the data after a period of regulation driven weakness.
Shane Oliver, AMP Capital
On the one hand, the global economy looks good, business conditions are strong, non-mining business investment and infrastructure spending are increasing, further export growth is expected, jobs growth is strong and the RBA still expects to see stronger economic growth and inflation.
But on the other hand, uncertainty around consumer spending remains high, wages growth remains low, inflation remains low, the Australian dollar is arguably too high and the RBA seems a little bit less upbeat on growth than it did a month ago.
All of this supports the case to leave rates on hold and with the RBA still expecting progress in reducing unemployment and getting inflation back to target “likely to be gradual” its likely to remain on hold for some time to come, particularly with the cooling Sydney and Melbourne property markets providing it with more flexibility on rates.
We have been expecting a rate hike later this year, but the risks are increasing that the RBA won’t start raising rates until sometime in 2019.
Su-Lin, RBC Capital Markets
The subtle changes and new additions were mixed and shed limited new insight. We highlight three.
Firstly, while adding that “the rate of wage growth appears to have troughed”, this largely states the facts consistent with the recent WPI data. Not surprisingly, the RBA stopped short of suggesting there were signs of further/sustained pick up. It simply remains too early given the degree of slack in the labour market.
Secondly, the explicit acknowledgement that “The housing markets in Sydney and Melbourne have slowed” is, again, consistent with the recent data and general recognition by the RBA of some softening in conditions.
Thirdly, the dropping of the reference to expectations for “a bit above 3%” growth over the next couple of years while still expecting stronger growth in 2018 than 2017 may garner a bit of attention but we doubt if there are any material changes to the GDP forecasts which are less than a month old.
We continue to hold lower GDP forecasts than the RBA and have also highlighted the weakness in the composition of growth with private domestic demand likely to be soggy but the RBA is still likely to be working with an above trend growth profile.
We stick with our base case for no change to the cash rate in 2018.
Belinda Allen, Commonwealth Bank
The RBA continues to balance three dominate themes: low inflation and low wages, strong employment, and household indebtedness and the housing market.
The outlook for wages is challenging, with recent RBA commentary noting firms are wary of increasing their cost base and instead using creative ways to attract and keep staff such as improving workplace conditions, extra hours, increasing perks and hiring bonuses. There is no guarantee that the recent stronger employment conditions will lead to stronger wages growth in the near term. The housing market has slowed but high household debt would still trouble the RBA.
We expect the RBA to leave the cash rate at 1.5% until November. Critical to this will be developments in both wage and inflation pressures and possible fiscal stimulus efforts released in the 2018/19 Commonwealth Budget handed down in May. Current market pricing has the first rate rise fully priced in around May 2019.
