From Westpac’s Bill Evans:
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 2.50%.
The two key areas of interest for the markets were around the language describing the Australian dollar and the outlook for monetary policy. For both issues the statement replicated the words of the July statement, i.e. “the exchange rate remains high by historical standards” and “on present indications the most prudent course is likely to be a period of stability in interest rates”.
In a speech on July 3 the Governor discussed communication issues for monetary policy and pointed out that at some point the term “period of stability” would be deleted from this statement. However he was at pains to point out that such a decision would not indicate an imminent change in rates, just that “a period of stability had in fact already been occurring and wasn’t entirely in the future”. That sentiment puts markets on alert for the time when that statement is changed however the trade-off between putting unnecessary upward pressure on the AUD by implying a policy change and being “true” to the sentiment seems pitched heavily towards keeping pressure off the AUD. As a result we would be surprised to see the “period of stability” wording deleted over the next six months.
There were two significant changes to the July statement in the detail.
1) “Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year”. This is in recognition of the slightly higher than expected print for underlying inflation in the June quarter. With underlying inflation now running at 2.8% for the year to June, policy flexibility is somewhat limited. However, the Bank emphasises it is still comfortable with the inflation outlook by once again noting that “growth in wages has declined noticeably”.
2) “The increase in dwelling prices has been slower this year than last year though prices continue to rise”. This is a somewhat ambiguous statement if one is trying to detect any unrest around the outlook for house prices. Clearly the Bank is keeping its options open with regard to its assessment of the house price outlook. It is our view that house price appreciation will gather some momentum from the slowdown we saw in the first half of 2014 but will not reach the pace of 2013.
Conclusion
The Bank is in no hurry to signal a policy change and we expect that the Statement on Monetary Policy (SoMP) which will be released on August 8 will confirm that assessment.
The best test of that will be whether the Bank chooses to send any signals via its inflation and growth forecasts. With the AUD remaining around the level that we saw at the time of the last SoMP in May we are not expecting any changes to the growth outlook. Most importantly that will mean that growth in 2015 is forecast at around trend indicating no need for a policy change in 2014.
We remain comfortable with our forecast that the next move in rates will be up but not until the September quarter of 2015.
