RBA starts the year on hold and in neutral: Shane Oliver

GUEST OBSERVER

As widely expected the RBA left interest rates on hold at its February Board meeting.

The RBA’s post meeting statement didn’t really provide anything new.

The RBA seems a bit more upbeat about the global economy, sees the September quarter GDP slump in Australia as largely temporary, sees inflation remaining low and the labour market as mixed.

Somewhat surprisingly it signalled little change to its growth and inflation forecasts despite the September quarter growth slump.

On growth it sees a return to reasonable growth in the December quarter (as we do) and continues to see growth around 3% in the next few years.

Similarly, its level of concern around the property market does not appear to have increased despite a further pick up in lending to property investors and continued rapid price growth in Sydney and Melbourne.

The RBA’s commentary around the property market was little changed from that seen in its December post meeting statement.

Overall, the basic message from the RBA remains that it is comfortably on hold at present with a neutral bias regarding future rate changes.

While the RBA retained its reference to an appreciating $A complicating the adjustment in the economy away from mining investment, the $A rose about 0.4% after the release of the RBA’s Statement.

This is presumably on the back of the RBA’s neutral bias and lack of any downwards revision to its growth and inflation forecasts.

With the $US undergoing a correction there is a real risk that the $A is on its way to another retest of the $US0.78 level, a break of which would open up a run to around $US0.80 which would be a real concern for the economy and the RBA.

So it’s surprising that the RBA has not ramped up its jawboning to try and lower the $A.

Our view remains that it will take longer for inflation to return to target than the RBA is allowing, particularly with wages growth remaining at record lows and the $A trending higher.

As a result we remain of the view that the RBA will cut rates again probably in May after the next round of inflation data and revisions to the RBA’s inflation forecasts.

Given the conflicting forces though, I would concede that our call for another RBA rate cut is a close one.

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.