RBA on hold for 11th month in a row, but rising $A presenting complications: AMP Capital's Shane Oliver
GUEST OBSERVER
As widely expected the RBA left interest rates on hold at its April meeting. This marks the eleventh month in a row with the cash rate remaining at 2 percent.
In its Statement accompanying the decision, the RBA again made very little changes and retained an easing bias. However, it did acknowledge the recent improvement in commodity prices and financial markets and dropped the reference to assessing the impact of financial turbulence on the economic outlook.
Significantly though the RBA singled out the rise in the value of the Australian dollar, which is up 6 percent since the last meeting, devoting a whole paragraph to the currency as opposed to a single sentence in last month’s Statement.
In noting that an appreciating Australian dollar could “complicate the adjustment underway in the economy”, the RBA has effectively reintroduced a subtle form of jawboning designed to try and push it back down again. The clear implication is that a further gain in the value of the $A could cause the RBA to act on its bias to cut interest rates again.
Our view remains that the RBA will indeed cut interest rates again in the months ahead for four reasons. First, growth is likely to slow back to around 2-2.5 percent as the contribution from housing fades reflecting falling building approvals (see the next chart) and fading wealth effects at a time when mining investment is still contracting. Second, unemployment is likely to remain relatively high at around 6 percent with jobs growth slowing. Third, inflation is likely to remain at or below the bottom of the RBA’s 2-3 percent inflation target.
And finally, the recent rebound in the value of the $A is a threat to trade exposed sectors like tourism, higher education and manufacturing helping to fill the growth gap left by a slowing housing sector. Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the $A could set the scene for a May rate cut, which is our base case, or failing that it could be delayed into the September quarter.
Source: ABS, AMP Capital
However, whether there is another rate cut or not from the RBA, it remains very hard to see rate hikes any time soon. So the period of low interest rates is set to continue.
Source: RBA, AMP Capital
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.