Governor’s recent statement discourages November rate move: Westpac's Bill Evans

GUEST OBSERVER

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

Arguably the Governor’s statement in October represents the fewest number of changes to the previous month’s statement that we have ever seen. This may be a clear strategy to discourage markets from expecting any imminent change in policy. Of course this is particularly important given that the next meeting will be in November, which is one of the four meetings per year where the Bank reviews its forecasts for both growth and inflation and therefore represents the most likely timing for a policy adjustment. In providing minimal wording changes the signal seems quite clear that it is unlikely that the Bank will see the need to substantially revise its growth forecasts and therefore need to further ease rates.

The most important change in wording was around the assessment of “regulatory measures”. In September the statement merely recognised that the policies were in place whereas in October “regulatory measures are helping to contain risks that may arise from the housing market”. This might seem to be a marked increase in confidence over the month although the minutes to the September meeting noted that “there were indications that the measures implemented by APRA had slowed the growth in lending for investment housing”.

Another change was around house prices where in September prices were acknowledged to have continued to rise strongly in Sydney whereas in the October statement both Sydney and Melbourne were singled out for “strongly rising prices”.

The key consistent themes around “softening conditions in China and east Asia”; “moderate expansion in the Australian economy”; “stronger growth of employment and a steady rate of unemployment over the past year”; “economy operating with a degree of spare capacity”; “inflation under control even with a lower exchange rate” were repeated in this statement.

As expected the wording around the Australian dollar was unchanged,” The Australian dollar is adjusting to the significant declines in commodity prices.” There was also no reason to change the commentary around the Australian dollar which prior to the September meeting was around US 71.20 and today is around US 70.80, with iron ore prices generally stable.

Of course the most important part of the statement is the closing paragraph which is repeated word for word from the September statement. Recall that this statement is ‘middle of the road’. On the one hand not signalling a specific change with terms such as ‘for the time being’ or ‘scope’  but  also not using the language of 2014  ‘the most prudent course is likely to be a period of stability in interest rates’.

Outlook

Markets have shaved the probability of a move this year to around 40% but still have a 100% probability of a move by February/March next year.

It is our view that the Bank will not need to sufficiently change its growth forecasts for 2015 and 2016 that would necessitate further policy support. That would mean rates on hold in both 2015 and 2016. However, risks on rates remain to the downside particularly around the global outlook; the terms of trade; and the labour market.

Bill Evans is chief economist of Westpac.