RBA on hold - no 'me too' hawkishness

GUEST OBSERVER

As expected the RBA left the official cash rate on hold at 1.5 percent for the eleventh month in a row.

In fact, apart from acknowledging the soft March quarter GDP outcome the RBA made only minor changes to its post meeting statement: it continues to see a broad based pick up in global growth, expects Australian growth and inflation to gradually pick up while acknowledging the softness in consumer spending and sees signs that conditions in the Sydney and Melbourne property markets are starting to ease and notes that supervisory measures should help address the risks around household debt.

More importantly, the RBA retained a somewhat neutral bias in terms of the outlook for monetary policy. Contrary to the expectations of some, there was no attempt to adopt a hawkish tilt in line with recent comments from the ECB, Bank of England and Bank of Canada.

Not following other central banks down a premature hawkish tilt was a good move because it saw the $A dip around 1% after the RBA announcement. Quite clearly the RBA remains concerned that “an appreciating exchange rate would complicate” the adjustment in the economy post the mining investment boom and adopting a hawkish tilt now would only have added to this concern. 

Our view remains that the RBA will be on hold for the next year at least, with risks around the consumer and a housing slowdown preventing hikes but a fading in the drag from the mining investment slump and solid employment growth heading off cuts. Around our base case, for the next year we still see more risk of a cut than a hike but by late 2018 and 2019 the risks are likely to swing towards a hike.

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.