From our Bill:
As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50% at the October meeting.
There had been some speculation that due to the Bank’s concerns about investor property it might eliminate the final sentence from previous statements: “On present indications, the most prudent course is likely to be a period of stability in interest rates.” We strongly advised our customers that this sentence was likely to be retained and that has proven to be appropriate advice.
The second issue was how the Bank would respond to the 4.5% fall in the AUD since the last Board meeting. The language around the currency certainly changed from “remains above most estimates of fundamental value” to “high by historical standards” but nevertheless made it very clear that given the falls in commodity prices the Bank remains unhappy with the level of the AUD.
Recall that the minutes of the September Board meeting contained very strong language around the risks of a build-up in asset prices. That sentiment was not at all apparent in the Governor’s statement following the September Board meeting. We should therefore not assume that the much more modest language used in the Governor’s statement today around investor housing – “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets” signifies less urgency around the investor housing surge – we will need to await the minutes of this meeting to assess whether the Board is becoming even more anxious around investor housing.
Sentiment around economic growth is broadly unchanged: “Overall, the Bank still expects growth to be a little below trend for the next several quarters”. There is a degree of scepticism around the recent increase in employment of 121k being described as “unusually volatile”. The most important points to understand about the Bank’s attitude towards the labour market are the consistent themes of “the labour market has a degree of spare capacity” and “growth in wages has declined noticeably”.
There is a heightened degree of concern around China. In September China’s growth was described as “generally in line with policymakers objectives” whereas that observation is now qualified with “though some data suggest a slowing in recent months”.
Conclusion
This statement is very much a status quo document. The Bank’s current issues remain: moderate growth and a below trend outlook; spare capacity in the labour market and weakness in wages growth; rising house prices and exuberant housing investors; and an overvalued Australian dollar.
It will take some time for the Bank to balance these issues and in the meantime interest rates are likely to remain on hold. We remain comfortable with our view that the next move in rates will be up but not until August next year.
Meh. Next move is still down, as soon as housing slows owing to macroprudential, as well as the income and capex shocks.