RBA in a holding pattern, for now: Paul Bloxham

GUET OBSERVER

The RBA kept its cash rate at 1.50 percent, as expected.

The short statement was very similar to the previous month, with identical language on the AUD, for instance. The most notable change was on the labour market, where the central bank stated that ‘stronger conditions ... should see some lift in wages growth over time’.

This was in addition to the comment, retained from last month, that the current low rate of wage growth is ‘likely to continue for a while yet’.

The RBA seems to be in a holding pattern, content that further cuts are not needed but waiting for evidence of a lift in inflation and wages growth before considering hikes. We expect stronger wages growth and underlying inflation to come through over the next few quarters and for the RBA to begin lifting the cash rate in Q1 2018.

Facts

The RBA kept its cash rate at 1.50%, as expected by all 27 economists in the Bloomberg survey.

Implications

Australian economic data continue to look positive, with strong employment growth, surveyed business conditions at the highest level in nearly a decade, commodity prices boosting export earnings, and (at last) signs of a material lift in non-mining business investment. Against that backdrop, the RBA clearly has increased confidence that lower rates will not be needed. The RBA Governor himself stated recently that the next move is more likely to be up than down.

At the same time, the RBA has deemed that higher rates are not needed yet, particularly as underlying inflation remains below target and wages growth is subdued.

However, the recent run of strong employment data may point to an improving outlook for wage growth and in one of the only changes to the statement today, the RBA noted that 'stronger conditions in the labour market should see some lift in wages growth over time'. But the RBA will want to see firm evidence of this happening before rate hikes are seriously considered.

The next couple wage and inflation data prints will be key. We expect both wages growth and inflation to climb from here, albeit only modestly. If history is a good guide, the recent lift in corporate profitability should filter through to some wages growth.

This year's minimum wage decision, which saw a bigger increase than last year, should also contribute to higher wages growth in H2 2017.

By early 2018, we expect GDP growth to be above trend, the unemployment rate to be even closer to full employment, underlying inflation to be well past its trough, and back in the 2 to 3% target band, and wages growth to be edging higher. With this backdrop we expect the RBA to be lifting its cash rate in early 2018. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.