From Matthew Hassan:
As widely expected, the RBA left the official cash rate unchanged at 1.50% at its July meeting. The Governor’s decision statement was also largely the same as in June with no substantive changes to the key closing paragraphs and other tweaks mostly minor and even-handed in terms of policy implications.
Indeed, there are only really four changes between the June and July decisions statements:
- On commodity prices, last month’s observation that “prices of iron ore and coal have declined over recent months as expected” is dropped with the July statement simply noting the “rise in commodity prices over the past year has boosted Australia’s national income”;
- On the global inflation backdrop, the Governor has added a line noting that “wage growth remains subdued in most countries, as does core inflation”;
- On growth domestically, the statement seems to take a less positive view: the slowdown in the March quarter which was previously viewed as “reflecting … quarter to quarter variation” now described as only “partly reflecting temporary factors”; consumption growth viewed as subdued and reflecting slow growth in real wages and high household debt; and the line reaffirming the Bank’s positive medium term outlook for growth to increase gradually to “a little above 3 per cent” was dropped (although this may simply reflect the fact that the Bank will be making a full reassessment of its forecasts leading into the August Statement on Monetary Policy).
- On labour market conditions, the Governor’s statement removes last month’s observation that “growth in hours worked remains weak”.
The closing three paragraphs – on financial conditions (“outlook … supported by the low level of interest rates”; “an appreciating exchange rate would complicate” the transition following the mining investment boom”); housing markets (varying “considerably around the country”; “additional supply of apartments … scheduled to come on stream”; “recent supervisory measures should help address risks”); and the policy view (no guidance) – are almost completely unchanged from June.
Notably absent from the Governor’s decision statement is any hawkishness around the medium term policy outlook. With several other developed economy central banks showing a surprisingly hawkish turn of rhetoric in recent weeks the market seemed to toy with the idea the RBA might say something similar – particularly given recent comments from an ex RBA Board member that a significant increase in the cash rate might be required over the medium term to return rates to ‘neutral’.
Also notable in our view is the absence of commentary around labour market slack – aside from solid gains in jobs and hours worked, the May labour force survey also showed a surprise fall in the unemployment rate to 5.5% and in wider measures of labour market slack that include underemployed workers. That suggests the Bank may be wary of making too much of these latest observations, particularly given the more uncertain link to wages growth.
Conclusion
Overall the July decision and Governor’s statement gives little additional information with only incremental changes in commentary. The minutes may provide some additional insight, particularly if medium term policy normalisation issues were discussed. However, we suspect the Bank will continue to hold a pointedly neutral stance on policy guidance. The August meeting could see a more material review of its commentary, with a key update on CPI inflation due July 26 and the Bank reassessing its economic forecasts ahead of the August Statement on Monetary Policy (due out August 4). However, even with some potential downgrade to 2018 growth forecasts (Westpac continues to expect growth of 2.5%, well below the Bank’s 3.25% mid-point forecast) none of this is likely to present enough of a case to establish an explicit policy bias. All up, we continue to see no reason to change our current view that the official cash rate will remain on hold throughout 2017 and 2018.
