From Westpac’s Bill Evans:
As expected the Reserve Bank Board decided to hold the overnight cash rate unchanged at 1.5%.
The commentary in the Governor’s statement was a little more upbeat than had been the case in December. In particular the global view has been lifted from global growth “lower than average” to “growth above trend in a number of developed economies.”
Another aspect of the importance of global growth has been the ongoing strength in commodity prices. This statement notes that the terms of trade have risen and this will boost national incomes.
The Bank confirms its forecast in November that growth in 2017 and 2018 will be around 3%. In fact the 2018 forecast is 3.5% and given the more recent official forecasts we saw from the Government in the December Mid Year Economic and Fiscal Outlook that 2018 number is likely to be shaved a little to 3.25%. Nevertheless 3% is considered to be above the Bank’s assessment of trend (2.75%) and therefore implies a gradually strengthening labour market.
The statement directly addresses the reported contraction in the economy in the September quarter attributing it to “temporary factors” with the RBA expecting a return to reasonable growth in the December quarter. In that regard while consumption is expected to remain moderate, non mining investment is anticipated to show “some pick up”.
Specific commentary on the labour market is largely unchanged with conditions described as mixed although the Bank notes that leading indicators are pointing to continued expansion.
Commentary on the housing market is also largely in line with the December statement with the market described as strengthening overall and prices rising briskly in some cities. In fact in December the statement pointed out that turnover had been lower and this comment is absent in this statement. There is also some emphasis on the tightening in lending conditions from the banks that will give the RBA some comfort with respect to any financial stability risks.
Commentary around inflation remains confident pointing out that the most recent inflation report was in line with expectations and both headline and underlying inflation were expected to rise above 2% over the Bank’s forecast period.
Conclusion
This statement clearly sets out the Bank’s current policy approach. That is, to hold rates steady in anticipation of a gradual lift in growth and inflation while imbalances in the housing market remain contained. We expect this thinking will be sustained throughout 2017 being supported by a rising terms of trade, a peaking construction cycle and a gradually falling unemployment rate with rates remaining on hold. Our central view for 2018 would be a similar policy stance despite clear preferences in the market for the beginning of a tightening cycle. Westpac’s view on growth in 2018 is that is it will slow down to a below trend 2.5% with housing construction contracting, the terms of trade falling, and ongoing moderation in consumer spending and business investment. This pitches the risks to the “on hold” call in 2018 to the downside in clear contrast to current market views.
That’s new. Bill has previously called the cycle bottom. Now he’s joined the MB view of a dour 2018. We see some of that weakness arriving this year as the terms of trade are already falling and dwelling construction peaking mid-year then getting worse next year with growth more likely 2% or worse. No sign of the bottom of the rates cycle.
