RBA keeps rates on hold - asserts that recent developments are in line with outlook

GUEST OBSERVER

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.

Relative to the last meeting in September, there were no significant changes in the Governor’s associated statement. On balance however, it is reasonable to conclude that the statement is a little more optimistic than we saw last month.

In particular, the commentary around non-mining business investment strengthened. In September, he noted “the outlook for non-mining investment has improved recently”. This time, “consistent signs that non-mining business investment is picking up"; “capacity utilisation has risen” and “a large pipeline of infrastructure investment is also supporting the outlook”. Curiously,  prospects for the residential housing investment cycle have dimmed further in the last month, yet, whereas in September he notes “little further growth is expected”, there is no discussion about this cycle in the October statement.

Significantly, the key drag on the economy from our perspective – a constrained household sector – still bothers the RBA, “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”.

The Bank, while noting recent strong employment growth, remains cautious about the unemployment rate, noting “the unemployment rate is expected to decline only gradually over the next couple of years”.

As expected, despite the fall in the Australian dollar from around USD 0.80 to USD 0.782 since the last meeting, the commentary around the AUD is unchanged, “the higher exchange rate… is weighing on the outlook for output and employment”.

Recently, RBA speakers have been emphasising their concern around the buoyant housing market as relating to housing debt outpacing growth in household incomes. In the paragraph on the housing market, the Governor’s statement leads with that concern, whereas in previous statements he has led with a discussion on  housing market conditions. The statement emphasises that recent macroprudential policies introduced by the regulator APRA are targeted at the medium-term risks associated with rising household debt. Having noted that, he does confirm that the signs that conditions were easing in Sydney which he noted in September have intensified – “further signs that conditions are easing”.

It remains our view that the RBA and APRA (the regulator) will continue to target macroprudential policies at the household debt issue rather than use interest rates in the context of a fragile economy.

Conclusion

As we have consistently argued, it appears that the Bank is expecting to raise rates sometime in 2018. With conditions in the housing market easing, and inflation and growth remaining sub-trend, there is no immediate urgency to move any sooner. However, we expect that as 2018 unfolds, the Bank will deem it necessary to revise down its growth assessments and continue to rely upon macroprudential policies to contain any further lift in the household debt to income ratio.

We continue to expect that rates will remain on hold in 2018 and 2019.

BILL EVANS is chief economist of Westpac.