Originally published by AMP Capital
As expected the Reserve Bank of Australia left the official cash rate on hold at 1.5% for the twelfth month in a row.
Overall, the RBA’s post meeting statement implies a neutral bias in terms of the outlook for interest rates. On the one hand it continues to see improving global conditions, it still sees a pick-up in Australian growth to around 3% and a gradual rise in inflation, it notes that employment is stronger and its still concerned about property price strength in some cities. But against this it notes that wages growth remains low both globally and in Australia, it notes that this and high debt levels will constrain consumer spending and it has become increasingly concerned about the impact of the rising Australian dollar.
In fact, it is in relation to the currency that the RBA has made the most significant changes to its post meeting statement. In particular, it has moved on from a simple comment that “an appreciating exchange rate would complicate” the adjustment in the economy to now devoting a whole paragraph to the rise in the Australian dollar and noting that it is now weighing on the outlook for growth and inflation and could result in a slower pickup in both than it currently forecasts. In other words, an appreciation in the value of the Australian dollar is a defacto monetary tightening and could be expected to result in a lower profile for official interest rates than would otherwise have been the case.
This marks a further pick up in the RBA’s attempts to jawbone the Australian dollar lower or at least stop its ascent that got underway with Deputy Governor Guy Debelle saying just over a week ago that a lower exchange rate “…would be helpful.” Its likely to be at least repeated in the Statement on Monetary Policy to be released Friday and could become even more strident going forward if the Australian dollar continues to rise.
Our view remains that the RBA will be on hold for the next year at least, with risks around the consumer, a housing slowdown, inflation and the Australian dollar preventing hikes but a fading in the drag from the mining investment slump and solid employment growth heading off cuts. A rate hike is unlikely until late next year. However, if the Australian dollar refuses to play ball and continues to rise the timing of a move to higher rates could be pushed into 2019 and rate cuts could be back on the table.
Of course the other challenge facing the RBA is the strength in the Sydney and Melbourne property markets. But clearly if this continues, the RBA’s inability to raise interest rates given the interests of the broader economy would necessitate a further tightening in lending standards by APRA.