Very few significant changes in RBA outlook: Westpac's Bill Evans
Guest Observer
As expected the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.
There are very few significant changes in the Governor’s statement relative to the statement in October.
On the positive side, the Governor has chosen to point out that prospects for non-mining business investment have improved “with the forward looking indicators being more positive than they have been for some time”.
Since the October meeting, there have been two significant retail sales reports. The report for August showed retail sales contracting by 0.6% and July sales being revised down to –0.2%. The report for September showed no bounce back from those disappointing results with sales being reported as flat. We were interested in how the Governor would assess the outlook for household consumption. In the event, all he did was point out that it was “one continuing source of uncertainty”.
There was also a disappointing inflation report since the last meeting. Underlying inflation printed 0.35% for the September quarter compared to market expectations of 0.5%. It now seems highly unlikely that underlying inflation will reach the 2% for 2017 that the Bank has been forecasting. Nevertheless, the statement only notes that “inflation remains low and is likely to remain so for some time”. However, the Governor repeats the Bank’s central forecast for “inflation to pick up gradually as the economy strengthens”.
There has also been clear further deterioration in the Sydney housing market. At this stage, the Bank is comfortable to note that “housing market conditions have eased further in Sydney”, without speculating about future dynamics. It will give the Governor considerable comfort to be able to note “housing prices have shown little change over recent months”.
Despite a further fall in the unemployment rate to 5.5% with annual jobs growth lifting to 3.1%, the Governor has chosen to maintain his measured description of the labour market, “the labour market has continued to strengthen”. He also repeats that some lift in wages growth can be expected over time. While we expect that the forecasts for the unemployment rate in Friday’s Statement on Monetary Policy will remain at 5.5%, there is a chance that the forecast for 2019 will be reduced to 5.25%.
This morning we released a note outlining our expectations for the Bank’s growth forecasts, which will be released on November 10. We expect the Bank to retain its growth forecasts from the August Statement on Monetary Policy at 3.25% in 2018, and 3.5% in 2019. The Governor notes that “the central forecast is for GDP growth to pick up and to average around 3% over the next few years”.
Since the last Board meeting, the AUD had depreciated from USD 0.788 to USD 0.768. Despite this welcome move, the Bank repeats its warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
Until recently, many forecasters were expecting the Bank to adopt a tightening bias in the November statement. Westpac was not of that view. Today’s statement repeats the neutral bias language of recent statements.
Conclusion
There remains a difference of opinion between us and the Bank on the growth and inflation outlook. The Bank is expecting above-trend growth next year despite uncertainty around the household sector and with the associated closing of the output gap along and a gradual move towards full employment, they will continue to forecast inflation moving back to 2½ per cent in 2019.
We accept that if that dynamic does come to pass, then the Bank will see opportunity to raise rates next year. However, our growth outlook is much flatter, particularly given our view on household incomes and wages, we do not expect that the need will arise to raise rates in 2018.
To read the full RBA report click here.