From Westpac:
As expected, the Board of the Reserve Bank decided to leave the cash rate unchanged at 2.0% in February.
In a departure from recent practise the Governor highlighted the two key forces that will be most significant in the Board’s future decisions are: firstly, “whether the recent improvement in labour market conditions is continuing”; and secondly, “whether the recent financial turbulence portends weaker global and domestic demand”.
This is significant in that global market conditions have been elevated as important factors in the bank’s thinking. However as indicated global volatility will be insufficient in its own right if there is no clear evidence of a feed through effect, particularly to domestic demand. Measures of particular importance here will be consumer and business confidence. To date the Bank notes that business conditions have moved to above average levels and we add that the recent 3.5% fall in the Westpac Consumer Sentiment Index, in response to market fluctuations, could well have been an over-reaction given the lack of other information available over the holiday period. Certainly, to date the Bank appears to be gaining confidence around domestic economic momentum pointing out in today’s statement that: “the non mining parts of the economy strengthened during 2015”. That compared with the December statement: “business surveys suggest a gradual improvement in conditions in non mining sectors over the past year.”
As we expected, the Board retained the moderate easing bias sentence: “Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”. This is in fact somewhat stronger than the December statement which referred to “the outlook for inflation may afford scope …” In fact, the commentary around inflation appears to recognise a lower inflation trajectory than indicated in December. In December: “inflation is forecast to be consistent with the target over the next one to two years”. In today’s statement: “consumer price inflation is likely to remain low over the next year or two”. The test of whether this wording is significantly different will come with the Bank’s inflation forecasts which are refreshed in February. These forecasts will be released with the February Statement on Monetary Policy on February 5. Our assessment has been that the Bank will retain the 2-3% inflation range in 2016 but there must be some doubt to this assessment based on the wording in the Governor’s statement today.
Other parts of the statement provided no surprises. With the AUD having fallen from USD 0.73 to USD 0.71 since the December Board meeting it was expected that the Governor would continue to describe the currency as having “continued its adjustment to the evolving economic outlook”.
In December the housing market was described as: “the pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months”. Despite a sharper than expected slowdown in prices in the last few months the description of the housing market remains the same.
In some recognition of the global volatility the Bank assesses that the global economy will grow “at a lower pace than earlier expected” highlighting weakness in emerging market economies including China.
Conclusion
Through all this market volatility and confident market pricing that RBA rate cuts could be expected as early as November last year Westpac has held the line that rates would remain on hold for the second half of 2015 and throughout 2016. There is not enough in today’s statement for us to change that view. In terms of the key issues highlighted by the Governor we do not expect to see a sustained continuation of current market volatility and certainly do not anticipate financial volatility substantially weakening domestic demand. We do accept that recent job reports have run somewhat ahead of our expectations and anticipate a modest ( catch up)lift in the unemployment rate over the course of the next six months. That development alone will continue to give markets hope that the RBA will cut rates further but we do not believe that the conditions will be there to drive that eventual result.
No Mining GFC there. I’ll take the other side of that bet, Bill.
