As widely expected by most economists including ourselves the RBA left interest rates on hold again for the third month in a row at 1.5% at it November Board meeting. After 5 November Board meetings in a row with no change, the idea that the RBA invariably changes the cash rate on Melbourne Cup Day has to be ditched as a relic of the period 2006-2011.
The RBA appears to be a bit more confident on China in the short term but still sees medium term risks there, it sees financial markets functioning effectively, and it continues to see Australia growing at a moderate pace, labour market indicators as mixed and inflation remaining low. And it continues to see an appreciation in the $A as complicating the rebalancing of the economy.
However, there were two key changes to its post meeting statement.
- Firstly, it inserted an explicit paragraph indicating that its forecasts for growth and inflation are little changed. This not only foreshadowed the Bank’s Statement on Monetary Policy to be released Friday but most importantly provided a bit more insight as to why they left rates on hold. Basically the RBA is saying that having already cut rates twice this year and with no further downwards revision to its inflation forecasts it saw no reason to cut again at this month’s meeting. The paragraph if anything further highlights the importance of the RBA’s economic forecasts in terms of driving its monetary policy decisions.
- Secondly, the RBA has moved to further acknowledge the concerns about the property market noting “briskly” rising property prices in some markets – presumably Sydney and Melbourne. This was likely another reason to hold back on another rate cut but may also be a signal to APRA that it may need to do something to further tighten lending conditions.
Overall the RBA appears to have taken the view that with September quarter inflation low but in line with expectations and the economy expected to grow around potential and then strengthen it was appropriate to leave interest rates on hold for now.
Short of a shock – eg a plunge in share markets in response to a Trump victory or a run of very soft economic data globally or in Australia, it’s hard to see the RBA cutting interest rates at its December meeting. So the focus will now shift to the February meeting next year. While the tone of the RBA’s Statement was basically neutral it’s too early to rule out further rate cuts 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. The RBA may also need to offset regulatory driven increases in bank mortgage rates. So we are allowing for one rate cut in the first half of next year. Regardless of whether there will be further cuts or not, a rate hike is probably two years away.
Finally, the continuing strength in the $A and the risks it poses begs the question as to why the RBA doesn’t just maintain an easing bias. The RBA doesn’t have to act on it and it costs nothing but will help prevent the $A from appreciating.
Originally published by AMP Capital