As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50%.
In the Governor’s statement he retained the key sentence “on present indications, the most prudent course is likely to be a period of stability in interest rates”.
Surprisingly they changed the wording around the Australian dollar although the sentiment remains the same. Instead of describing the AUD as “high by historical standards” it is now described as “remains above most estimates of its fundamental value”. This description sits better with those of us who have observed the sharp fall in iron ore and coal prices while the AUD has risen. However it does not appear that the change in language has any implications for the policy outlook.
The economic data that appeared to impress the Bank the most over the last month and therefore triggered a change in wording from the August statement was around business and consumer sentiment. The Westpac-MI Consumer Sentiment Index rose 3.8% in August while the NAB business conditions index reached its highest level since March 2010. Those prints prompted “The most recent survey data indicate gradually improving business conditions and some recovery in household sentiment”.
The ABS survey of investment intentions (Capex survey) also provided some encouragement for the Bank for non mining investment. In August it noted “signs of improvement in investment intentions in some sectors are emerging”, whereas today’s note states “Investment intentions in some other sectors continue to improve”. Of course both statements refer to investment in the resources sector “starting to decline significantly”.
It was interesting that the Bank implied a degree of scepticism around the jump in the unemployment rate from 6.0% to 6.4% given that it points out “some improvement in most other indicators for the labour market”. However it points to the labour market continuing to have “a degree of spare capacity” and repeats that “it will probably be some time yet before unemployment declines consistently”. Note that in the August Statement on Monetary Policy the Bank lowered its growth forecast for 2015 and pushed back the forecast timing of a consistent fall in the unemployment rate from 2015 H2 to 2016 H1.
The Bank notes that interest rates have continued to edge lower in recent months as competition to lend has increased. That signals to the market that competition has in a way done the Bank’s job by further easing monetary policy without the need to cut the cash rate. This development makes it even harder for forecasters to expect another rate cut.
Conclusion
As expected there is nothing significant in this statement to motivate us to change our forecast that the next move in rates will be up but not for at least a year. Our official forecast is for a 25bp increase in the cash rate at the Board meeting in August next year. The statement continues to emphasise the significant decline in mining investment; spare capacity in the labour market; moderate economic growth ; a noticeable decline in the growth of wages and an overvalued AUD. All of these factors point to no urgency to raise rates while improving business and consumer confidence; increasing credit growth; rising dwelling prices; and market driven rate cuts also eliminate any need for the Bank to cut the cash rate.
