RBA on hold as expected, awaiting "further information": Shane Oliver

GUEST OBSERVER

There were no surprises from the Reserve Bank of Australia which left the official cash rate on hold again at a record low of 1.75 percent. This was the consensus expectation and our own. 

For the most part, the Statement accompanying the RBA’s decision to leave interest rates on hold was little changed except in so far as indicating that most markets have continued to function effectively despite the Brexit vote and that its impact on global activity outside the UK may be hard to discern (what was all the fuss about!).  

Furthermore, the RBA continues to sound fairly relaxed about the renewed pick-up in dwelling prices in recent months, particularly given the large supply of apartments to hit the market in the next two years. This suggests that worries about excessive house price growth are probably not constraints on additional RBA monetary easing.

More importantly, changes to the closing paragraph in the RBA’s Statement have arguably softened its neutral bias and opened the door to another easing.  Specifically, the RBA’s newly inserted reference to “further information” over the period ahead that should allow it to refine its outlook and “make any adjustment to the stance of policy that may be appropriate” is likely a reference to the June quarter inflation data due later this month and possibly a broader reference to allowing time to be able to better assess the impact of Brexit and the Australian election and the risks to the Australian dollar, an appreciation in which the RBA continues to see as complicating the post mining boom adjustment in the economy. Since a rate hike is most unlikely, the “adjustment” that the RBA is referring to is presumably another possible interest rate cut.

We remain of the view that the RBA will cut rates again later this year. The risks to inflation are on the downside thanks to underlying deflationary pressures globally and record low wages growth domestically; the risks to global and Australian growth are still on the downside (with Brexit and the messy Australian election not helping); and the $A is still too high and at risk of further appreciation given the Fed’s endless delays in raising rates again. 

As such we are continuing to allow for two more 0.25 percent rate cuts this year, the first in August just after June quarter inflation data is released and when it next reviews its economic forecasts.

 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.