From Bill Evans at Westpac:
As universally expected, the Reserve Bank Board decided to keep the cash rate unchanged at 1.50%.
The market was given a clear understanding of the Governor’s intentions when he commented to the House of Representatives Standing Committee on Economics: “The main effect [of a rate cut] would be more borrowing for housing pushing up house prices.”
As we discussed in the preview to this meeting, the Governor is aware of clear evidence that last year’s rate cuts did stimulate a strong recovery in house price inflation and household borrowing and he was never going to be of a mood to repeat that exercise in the current environment.
There were a number of changes in the statement from the statement in February, some positive and some less so.
Firstly, he made the following comment: “Most measures of business and consumer confidence are at or above average”.
He also gave us the closest we have seen to an official forecast on US monetary policy where he noted: “Interest rates are expected to increase further in the United States”. That probably implies that he expects a March rate hike from the Fed, in line with our own thinking.
On the less encouraging side, he refers to the insipid growth in household incomes and linked to that effect the observation that employment growth has been concentrated in part time jobs. Those considerable headwinds for the economy have been known for some time but, recently, he has not chosen to highlight them.
As we saw in the December quarter national accounts, the stronger consumption came at a cost of a lower flow into savings with the savings rate plummeting.
Despite the recent fall in the Australian dollar the standard “warning” on the exchange rate remains: “an appreciating exchange rate would complicate this adjustment”.
The commentary around the housing market was shorter than in February despite our warnings that further macroprudential policies may be being considered.The Governor’s statement was restricted to “supervisory measures have contributed to some strengthening of lending standards”.
There were no changes in the assessment of the global economy or inflation.
Conclusion
Last year we predicted a rate cut in August to be followed by an extended period of steady rates in 2017 and 2018. Markets were unconvinced and priced in at least one further rate cut. That pricing has now been replaced with nearly two rate hikes in 2018.
We do not expect that the Australian economy will be sufficiently robust in 2018 to justify a return to a tightening cycle and continue to forecast rates on hold in 2017 and 2018.
