Australian Financial Review
The Reserve Bank of Australia on Tuesday kept rates on hold at 1.5 per cent, defying the global trend towards easier monetary policy even as it adopted a more cautious tone in the accompanying statement.
While Tuesday’s announcement was widely expected, there had been conjecture that the RBA would begin laying the rhetorical groundwork for lower rates later this year – an outcome already largely priced into financial markets.
Instead, governor Philip Lowe’s statement accompanying the decision remained largely unchanged and provided no explicit hints that the central bank was contemplating lower rates.
There was, however, evidence the RBA board has become more cautious over the outlook since they last met in March, noting that “downside risks” to the global economy “had increased”.
Falling property prices in Sydney and Melbourne and their potential impact on household confidence and spending remains a prime concern for RBA officials, and Dr Lowe in Tuesday’s statement made more explicit reference to these worries.
“Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets,” he said.
This line was “significant, given that prior communication has referred to weaker household consumption as a downside risk, rather than reality,” JP Morgan rates strategist Sally Auld said.
Dr Lowe again highlighted the contrast between a jobs market in rude health and poor economic growth.
“The GDP data paint a softer picture of the economy than do the labour market data,” he said.
The statement also removed references to the economy growing at 3 per cent this year, noting that GDP rose by “just” 0.2 per cent in the December quarter.
“The RBA’s strong stance on the labour market suggests that the unemployment rate remains the key criteria for rate cuts in future,” Ardea Investment Management portfolio manager Tamar Hamlyn said.
“The references to the weakness in GDP data, however, provides a path for retreat if in future the divergence between the strong labour market and the weak GDP data is resolved in favour of the latter.”
Investors and economists also pointed to a new line at the end of the statement which said the RBA board will “monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”, suggesting policymakers, again, were taking a more cautious view.
After shifting to a neutral stance at its February meeting, Ms Auld, who predicts two rate cuts by the end of the year, said the RBA in its latest statement “took small yet significant steps towards a formal easing bias”.
The implied probability in futures markets of at least one rate cut by December rose to 85 per cent following the announcement from 81 per cent shortly before.
Article appeared in The Australian Financial Review on 2 April 2019.
Article written by Patrick Commins.