Fresh from our Bill.
As expected the Board decided to leave the cash rate unchanged at 2.5%.
There were only minor changes in the Governor’s compared to the statement following the April Board meeting. We were most interested in the rhetoric around the Australian dollar given that in December it was referred to as “uncomfortably high” at US0.912. Today’s level of 0.928 has not evoked stronger language than “the exchange rate remains high by historical standards”. Of course this was the language used at the April meeting when the AUD was printing USD0.924 but it was reasonable to expect that with concerns around a lift in inflation having subsided with the March quarter print for core inflation falling from 0.9% in December to 0.52% in March stronger language around the AUD might reasonably have been reinstated.
In the event a preference for no change prevailed over a decision to restore a successful strategy that assisted in the fall in the AUD from USD0.95 to USD0.87 through 2013.
There were only four other changes in the statement from April:
1) recognition that commodity prices have recently softened;
2) describing the outlook for the housing construction cycle as “strong” rather than “solid”;
3) recognising that the unemployment rate had fallen in March but maintaining a cautious view towards the labour market by indicating that “it will probably be some time yet before unemployment declines consistently”;
4) linking ongoing weak wages growth to a moderation in the prices of non-traded goods and services. This link had been a source of some frustration for the Bank given that wages had clearly weakened but non traded inflation had been stubbornly high. It appears that this was the most significant take-out by the Bank of the surprise 0.52% print in core inflation for the March quarter rather than recognising that the pass through from the weak currency in 2013 had largely run its course in the December quarter.
Conclusion
The Governor repeated the key statement that “the most prudent course is likely to be a period of stability in interest rates”. Our view that rates will remain on hold until the second half of 2015 is not widely held by other economic commentators with two thirds expecting rate hikes by early 2015 and some still anticipating rate cuts.
From our perspective encouraging evidence around the consumer, residential construction, exports and jobs preclude the need for lower rates whereas extensive spare capacity, a high AUD, the ongoing downturn in mining and a rising unemployment rate (despite a stronger jobs environment than in 2013) all point to an extended period of interest rate stability.
