The Reserve Band of Australia’s November Statement on Monetary Policy reinforces the impression that the RBA’s bias on interest rates is neutral for now. As foreshadowed in the post Board meeting statement released earlier in the week the RBA’s forecasts are little changed – with growth expected to average around 3% before stepping up to around 3.5% in December 2018 and inflation likely to step up to around 2% by mid next year and then remain there at least out to 2018.
In addition the RBA sees: the pick-up in bulk commodity prices as being largely a function of stimulus measures in China but sees the terms of trade holding above the low seen early this year; the risks to global inflation as now being more balanced; a diminishing detraction to Australian growth from falling mining investment; the risk of property oversupply in some, particularly inner city, locations; the unemployment rate edging a little lower and a rise in labour costs as labour market conditions improve.
With September quarter inflation in line with expectations and little change to its growth and inflation expectations the RBA looks to be happily on hold for now.
Short of a shock – eg a Trump victory driven financial panic or a run of very soft economic data - it’s hard to see the RBA cutting interest rates at its December meeting. However, while the RBA’s bias at present is basically neutral we are continuing to allow for a rate cut during the first half of next year as housing construction will slow, house price momentum is likely to soften leading to fading wealth effects, falling full time jobs are a concern for consumer spending, credit growth is slowing and inflation risks are skewed to the downside and the RBA may also need to offset regulatory driven increases in bank mortgage rates.
Meanwhile, September retail sales rose by a stronger than expected 0.6%mom (or 3.3%yoy) with August retail sales revised up slightly to 0.5%mom. This followed a soft patch which was reflected in a -0.1% fall in real retail sales for the September quarter as a whole. So while the pick-up in retail sales in August and September is good news, the weak September quarter outcome points to soft September quarter growth in consumer spending overall.
The September bounce in retail sales was driven by household goods which should benefit from rising dwelling completions and hence fit out demand. Going forward retail sales growth should be supported around 3-4% yoy with slowing jobs growth, slow wages growth and slowing wealth affects partly offset by ongoing low borrowing costs, the high savings rate and the completion of new dwellings.
Originally published by AMP Capital