Here’s a sensible commentary from Stephen Walters at JP Morgan:
The RBA today surprised no-one by leaving the cash rate steady at 2.5%, as all 33 surveyed economists had anticipated. The focus, then, was on the commentary and, here, there also were no bombshells. Having eased two months ago, the statement indicates that RBA officials are content to sit on the sidelines while they await further signs that the drip-feed of rate cuts since late 2011 are having the desired effect. There are encouraging signs, for sure, particularly in housing, but also evidence that not all is going to plan on the economy’s transition away from mining investment as the dominant driver of growth.
Today’s statement differs little from that delivered a month ago except, of course, for the necessary insertion of a reference to “changes in the outlook for US monetary policy”. Also, the optimistic phrase about changes in households’ saving behavior, which disappeared last month, returned. There was no additional emphasis placed on the domestic housing market, although officials acknowledge that consumer and business sentiment has improved. There were wording changes around AUD, but whether these are meant in absolute terms or relative to commodity prices is not clear. This modified wording, though, seems to reduce the emphasis on the potential problems caused by the elevated currency.
We still believe the RBA carries an easing bias, but it clearly is no longer as explicit as before. Indeed, the statement today again left vague the policy guidance. In the August minutes, officials dropped reference to there being “scope to ease policy further should that be required to support demand”, having included the phrase in the statement on meeting day! There was no such verbiage included today, either. Instead, the “guidance” implied merely that officials were assessing the outlook and would adjust policy as needed. By “adjust”, they mean ease policy, but Board members clearly are in no rush to act. They need a trigger.
We still are of the view that the RBA will lower the cash rate at the next Board meeting in November, with a necessary combination of “triggers” getting officials over the line. First, the steady rise in the jobless rate indicates that output growth remains below trend, mainly because the much-anticipated transition to a post-mining-boom-world is not going entirely to plan. Next week’s jobs report probably will show another rise in joblessness. Second, the CPI result released on October 23 likely will show a headline rate below the bottom of the RBA’s target band, so the scope to ease that officials previously referred to will become more apparent.
And, third, AUD probably remains above where officials would like it, even though today they decided against again describing it as “high”. Yet, AUD sits 3% above the level prevailing at the September Board meeting. The RBA repeatedly has claimed that a lower AUD would aid the all-important rebalancing in the economy – they repeated the mantra today. It follows that a higher AUD hinders this process. Lowering the cash rate, or perhaps just talking about the possibility, could remove some support for AUD, even if the effect is not long-lasting.
We do not believe the early signs of exuberance in the housing market are a constraint on the RBA easing policy again. The rise in house prices, along with supporting evidence that the market for existing homes is heating up, is a necessary condition for residential construction activity to lift, which is the ultimate aim of RBA officials and a key reason they have lowered the cost of capital. It would be odd for them to baulk at signs that easier policy is working pretty much as they intended in the most interest-sensitive sector of the economy.
Moreover, outside housing, the earlier rate cuts don’t seem to have got much traction; retail sales improved modestly today, but this follows a lousy few months, and investment outside mining continues to languish. We suspect officials are willing to tolerate unsubstantiated talk of housing “bubbles” and other such silliness for as long as it takes to get traction in other parts of the economy. This is particularly so while housing credit growth remains close to all-time lows, and while the rises in (national) house prices are broadly in line with growth in household income.
Along with the crucial CPI release later this month, there are plenty of RBA “events” leading in to the November Board meeting. Governor Stevens is scheduled to speak twice, and Deputy Governor Lowe also will make a public appearance in between. These speeches would allow the Bank to massage market expectations back towards the possibility of a rate cut before end year, if they believe it necessary. Finally, the minutes from today’s meeting are released in a fortnight; recent minutes have revealed that officials don’t mind fiddling with the policy guidance paragraph, in particular, so watch that space.
I agree with the economic assessment but not that of housing. I do think the RBA will be concerned that house prices are accelerating and construction is not. Today’s statement was more neutral than last month and it will take further material deterioration in the data to trigger another cut. Bill Evans is closer to the mark on a the chances of a November cut receding:
At its October meeting the Reserve Bank Board decided to leave the cash rate unchanged at 2.5%. There was no change in the wording of the final paragraph from both the September and August meetings. Policy was described as “remaining appropriate” and the Board will continue to “assess the outlook and adjust policy as needed”.
This paragraph is consistent with the Board having a neutral bias. However we have seen in the minutes of both the August and September meetings that “members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them.” That wording indicates an easing bias although a likely neutral stand for the next meeting. We will have to await the minutes which are released on October 15 to find out whether this easing bias has been retained and whether the next meeting has been ruled out.
It seems likely that will be the case given that in the September statement the Governor noted the 15% fall in the AUD since April but described it as “high” and indicated that it may depreciate further over time. In this statement he notes it has risen to be only 10% below its April level and does not commit to it falling further.
The major development since the last meeting has been the boost to consumer and business sentiment in the wake of the election victory of the Coalition. Appropriately the Governor is cautious around this result (note our work on the comparable behaviour of confidence following the 1996 election victory of the Coalition) pointing out that “it is too soon to judge how persistent this will be”.
The second development has been further improvements in house prices. Media coverage has focussed on a “housing bubble”. However the Governor appears to be having no part of that and merely points out that there have been signs of an increased demand for finance from households.
There was a neat recognition of the Westpac-MI Consumer Sentiment survey. He refers to evidence from the survey that savers are changing their savings preferences away from low return low risk assets to higher risk assets. However ,appropriately,he does not use that observation to highlight a property bubble risk.
There was the same consistent story from August and September around: “growth a bit below trend expected to continue”; “unemployment rate edged higher”; “growth in labour costs moderating”; and “global growth running a bit below average”. On the positive side he continues to point out:: “the easing in monetary policy has supported interest sensitive spending and asset values”; “global financial conditions remain very accommodative”; “long term interest rates remain very low”; and “ample funding available for creditworthy borrowers”.
Conclusion
This statement provides only limited encouragement to our view that rates are likely to be cut again in November. However, as discussed ,we will need to see the minutes to determine whether the Board retains an easing bias. There are five weeks to the next board meeting.Over that time there will be considerable developments in currency markets; the labour market; inflation; confidence measures and credit/housing markets that will decide whether the Board decides to cut further. Our forecasts point to that likelihood while recognising that it would not be a policy mistake to delay the decision to December to obtain even more information around the issues discussed above.
