Oh yes:
The RBA added a sense of caution and concern to its easing bias at the February meeting. On our reading, there are signs of the tension between what the backward looking domestic data and contemporaneous global developments imply for the Australian economy’s outlook in the RBA’s post meeting statement. Flexibility is often the best solution in balancing opposing forces and the RBA appears to have delivered.
As we highlighted in our Statement on Monetary Policy (SoMP) preview, developments since the RBA’s November SoMP point to limited downside to the RBA’s inflation outlook. The post-meeting statement highlights that there were ‘reasonable prospects for continued growth in the economy, with inflation close to target’.
But the RBA has indicated that this assessment was vulnerable to incoming information. There are two key concerns that the RBA has highlighted in their discussion of the monetary policy outlook: whether recent labour market strength persists; and what recent financial market developments imply for, and spill over to, global and domestic growth prospects.
On the domestic front, we think the RBA is unlikely to have enough evidence – particularly from the labour market – to justify a shift lower in policy until we reach the May Board meeting. This is obviously contingent on the absence of an external shock but more importantly on what the expectations survey in the 4Q15 capex data tells us about the resilience of non-mining investment. Whilst there is currently an improvement in the labour market, as the economy transitions towards more labour intensive services activity, the upcoming sample rotation risk that the ABS has flagged means that a ‘clean read’ on the underlying strength of labour demand is unlikely over the next few months.
The elevated concern incrementally adds to our conviction in our forecast for additional easing in May. Concerns about the effectiveness of further rate cuts may remain but a rate cut may be needed to offset increases in borrowing rates driven by higher funding costs.
Whilst the labour market and household income appear relatively buoyant, the factors underpinning that strength – a decline in the import penetration ratio and an increase in the wage share of income – are one-off shifts. An injection of public demand, especially through a boost in the supply of productivity enhancing infrastructure, would be a welcome addition to the economy’s rebalancing.
Looser fiscal policy would reduce the extent to which a lower exchange rate is required in order to transition the economy – and the necessity for lower rates to foster the necessary depreciation. This remains the IMF’s broad recommendation for economies like Australia, which retain significant fiscal firepower (low debt levels). In our view, the potential for a fiscal boost – which is difficult given the prospective revenue impacts of a further deterioration in commodity prices and politically challenging – is a key risk to our forecast for the A$ to push down to the US$0.60-0.65 zone through 2016, aided by rate cuts.
For now, we remain of the view that the most likely outcome is one where the RBA is drawn to act on its easing bias from mid-2016, particularly if the A$ does not depreciate as anticipated. Our forecast is for the cash rate to fall a further 50bp to 1.50%, with cuts in May and August. Decisions by other policymakers – both domestic and offshore – will ultimately, in our view, shape the trajectory for the economy and rates in 2016.
It comes.
