Reserve Bank to keep rates on hold throughout 2015 and 2016: Westpac's Bill Evans

Reserve Bank to keep rates on hold throughout 2015 and 2016: Westpac's Bill Evans
Reserve Bank to keep rates on hold throughout 2015 and 2016: Westpac's Bill Evans


As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2%.

In the Governor’s statement the recent equity market volatility and ongoing weakness in China was noted. However, he chose to nominate offsetting effects in both cases. For China, he noted “stronger US growth” and for the equity markets he noted that “other financial markets have been relatively stable”. If that was a deliberate strategy then we can interpret it as indicating that the Bank is reasonably comfortable with these recent developments.

However it appears that the view on China may have softened somewhat relative to last month given that the minutes to the August meeting noted that “the downside risks to the outlook for Chinese growth identified over the past year had receded somewhat”.

At the August meeting the AUD was trading around USD 0.7275. It has subsequently fallen to USD 0.715. That is despite a modest increase in Westpac’s broad commodity index of 1.5%. Not surprisingly this welcome result encouraged the Governor to repeat the AUD commentary that was used in August: “the Australian dollar is adjusting to the significant declines in key commodity prices”.

Whereas in August the Governor expected the Federal Reserve to start increasing its policy rate “later this year”, he now expects the increase “over the period ahead”. This moderation in the Fed view is not significant for policy with the AUD down at these levels. If for instance the AUD had lifted sharply since the August meeting then a less confident outlook for Fed policy would have been significant for the RBA’s own policy.

In the August Statement on Monetary Policy the Bank revised its unemployment forecast from steadily rising to 6.5% to flattening out around current levels of 6%. The July jobs report printed an unemployment rate of 6.3% but we expect that has not been enough for the Bank to change its view on unemployment. In that regard the commentary used in the August Governor’s statement – “somewhat stronger growth in employment and a steady rate of unemployment over the past year” – was repeated. I expect it would be necessary but not sufficient for the Bank to cut rates to see an  upward revision to that unemployment forecast.

There is no change in the commentary around credit growth (“moderate”) the housing market (“prices continue to rise strongly in Sydney”) and the growth outlook (moderate expansion with “a degree of spare capacity”) and the final paragraph of the statement is unchanged from August with the final line: “Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

The outlook

Despite the market pricing in a 100% probability of a rate cut by year’s end, Westpac continues to expect that rates will remain on hold over the course of 2015 and 2016. Risks around that view are clearly to the downside with the labour market; momentum in domestic demand; the global economy and the Australian dollar remaining key swing factors.

From our perspective we do not think that the high degree of inertia which the Bank has towards further rate cuts will be tested.

Bill Evans is chief economist of Westpac.

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