+ About Michael Witts
Wednesday, April 05, 2017
What was discussed at today’s RBA meeting? What are the RBA’s main concerns?
The RBA left the cash rate unchanged following yesterday's Board meeting. This outcome was widely anticipated across financial markets. Current expectations are that the RBA will be on hold over the balance of 2017 and into the first half of 2018.
The RBA remains positive on the global economy and has called time on any further easing of monetary policy across the globe. In this environment, it is challenging to identify a scenario in which the RBA would ease the local cash rate.
The housing market received more than usual attention in the statement released after the meeting. The RBA highlighted their concerns around the growth of interest-only lending and the extent to which lending standards may be at risk of compromise given the demand for housing funding. The Bank again highlighted the patchy nature of the housing market, with most activity focused on the east coast and largely in Sydney and Melbourne.
However, even within these cities there are multiple markets operating at different speeds. The looming oversupply of apartments was highlighted, suggesting the RBA perceives i increasing settlement risks. The growth in household debt at a rate well above the growth in household income continues to be unsustainable over the long run, and has the potential to be of serious concern in the event of labour market weakness.
What is the RBA’s view on the Australian dollar?
The RBA again re-iterated that a further strengthening of the AUD would complicate the transition process from mining investment towards non-mining sectors. The very strong trade surplus announced yesterday further highlights the combined benefits to the Australian economy of higher export volumes, as the next phase of the mining boom comes on stream ie. the production phase, combined with the turnaround in commodity prices evident since mid-last year.
This outcome will underwrite solid income across the economy in the period ahead. In regard to the exchange rate, longer-term movements are the relevant considerations rather than month-on-month movements. In this context, the AUD remains well below its average level from, say, three years ago.
Looking forward, given the high likelihood of the US Federal Reserve continuing to raise US interest rates, it is reasonable to expect the US dollar to strengthen resulting in the AUD moving below 75 cents towards 70 cents.
Has the RBA changed its view on property market in Australia? What is ING Direct’s view on property prices?
In relation to property prices, as previously noted, there is not a single property market in Australia, let alone within cities and or regions. The recent action by APRA and ASIC, after consultation with the RBA, means that in those markets driven by high levels of investor activity, bank loans for investment properties and interest-only loans will be more expensive. In effect, there will be an increasing gap between interest rates on owner-occupied loans and investor loans.
This is, in some way, a return to market conditions from say 20/25 years ago, when there was a clear differential between interest rates to these two types of borrowers. The regulators believe this will take some of the froth out of the market. Time will tell.
It appears likely that the upcoming Federal Budget will potentially include measures to decrease the attractiveness of housing investment. All of these measures are directed at the demand side of the equation, however, equal if not more focus should be applied to the supply side together with transport infrastructure.
What is ING Direct’s view on the economy?
Overall, the economy appears to be in reasonable shape with the prospect of continued broad-based growth in the period ahead. The immediate issue that needs to be addressed is how to take sufficient steam out of the housing market, while at the same balancing the competing forces such that prices can be stabilised without sharp negative moves in the event of a marked contraction in demand. This is especially the case given the looming over-supply of apartments, to which the RBA has referred to on a constant basis over recent months.
Wednesday, March 08, 2017
What was discussed at yesterday’s RBA meeting? Were there any major differences compared with the December statement?
At today’s meeting, the RBA kept the cash rate unchanged at 1.50%. This outcome was broadly expected across financial markets.
The RBA was slightly more upbeat in its assessment of the global economy than it has been previously. While highlighting the stronger growth in prospect for China, the Bank warned that the debt funded nature and the composition of the growth suggest that risks remain in the medium term.
In other aspects, the commentary was largely consistent with similar statements over recent months.
In terms of global monetary policy, the Bank was particularly forthcoming in their comments, noting; “Interest rates are expected to increase further in the United States and there is no longer an expectation of additional monetary easing in other major economies”. Against this background, it is challenging to see the RBA leading central banks by cutting rates in Australia over the course of 2017.
What are the RBA’s main concerns?
While noting that the RBA was generally upbeat about the global and Australian outlook, several aspects were highlighted as potential concerns, including:
- The speed, source and composition of the Chinese growth story.
- While consumption growth in Australia was strong over the final quarter of 2016, it was largely funded by running down savings as income growth remains subdued. This is not sustainable over the medium term, especially given the high level of household indebtedness and the likely higher level of interest rates at some stage in the future.
- A further appreciation of the exchange rate will complicate the adjustment process currently underway.
What is the RBA’s view on the Australian dollar?
While the RBA rarely comments directly on the exchange rate, it is clear they would prefer to see a lower AUD as opposed to the continuation of the recent strengthening trend. The path of the AUD is being influenced by two opposing forces; namely stronger commodity prices and the very strong likelihood of higher USD interest rates. In the end, it is likely the AUD will retreat from current levels as the current heat in the commodity markets cools and equally as US rates move higher.
What is the RBA’s view on inflation this year? Could this lead to rate rises this year?
The RBA sees inflation picking up over the course of 2017 to be above the lower boundary point of 2%. Underlying inflation is expected to rise on a slightly more gradual trajectory. On this basis, it is difficult to see inflation being a driver for higher interest rates.
What is ING Direct’s view on the economy?
We would broadly agree with the RBA’s view on the economy and the outlook for interest and exchange rates. In terms of interest rates, we expect to see them move higher towards the end of 2017. This will be on the basis of stronger growth across the economy, in part driven by a lower exchange rate thanks to higher US interest rates.
The sustainability of the recovery in consumer spending is a concern. The run down in savings means the economy is potentially exposed to the impact of higher interest rates. Income growth over recent years has been flat. Consumers have opted to run down savings rather than adjust their standard of living; this has potentially been on the basis of the wealth effect from higher housing prices.
Wednesday, February 08, 2017
What was discussed at today’s RBA meeting? Were there any major differences compared with its December statement?
While the wording was different, the sentiments expressed in the statement released following the meeting were generally consistent with previous months.
While leaving the cash rate at 1.5%, the RBA noted that on a global basis there is no longer an expectation of further monetary easing in other major economies. Against this background, it is unlikely the RBA would be keen to move the cash rate lower in the absence of a significant adverse development in either global or domestic factors. Given the heightened geo-political risks that currently exist, this risk cannot be ignored.
What is the RBA’s view on Australia’s economy and the global economy in 2017? Is this different to ING Direct’s view?
The RBA was reasonably upbeat about both the global economy, with above-trend growth expected, and the domestic economy, with growth of around 3% over the next couple of years in the central scenario. We would share this view.
It is important to note that the increased production from the resources sector is beginning to flow sharply into higher value of exports - this is contributing to a sharp lift in national income. This is also reflecting in the surplus on the trade account over the two months.
What are the RBA’s main concerns?
The RBA again cited the positive impact of the lower AUD over recent years, especially in the services and education sectors. However the RBA warned that a further sustained increase in the exchange rate would complicate this contribution.
Although overall employment markets in aggregate appear to be satisfactory, the RBA noted that there was considerable variation in labour market conditions between states and across regions.
What is the RBA’s view on the property market? Are they concerned about apartment oversupply issues?
The RBA made similar observations in relation to the property market with activity varying considerably around the country. Based on the RBA analysis, it appears that investors have returned to the market with renewed interest following a pause over the second half of 2016. The RBA suggests that as leverage is increasing and household debt-to-income ratios accelerate, further supervisory action may be required. Equally, lenders have begun to apply further differential pricing towards the investor segment.
The looming over-supply of apartments on the eastern seaboard is again highlighted by the RBA. It is noteworthy that they do not draw any pricing conclusions from this development, however it is clearly a key watch point.
Can we expect any rate cuts/rises in 2017?
It appears now very clear that the RBA will be on hold for the balance of 2017.
The caveat to this would be adverse developments on the global stage that have a knock-on effect to the domestic economy. The increasing range of potential geo-political hot spots around the world could ignite an adverse economic outcome.
Wednesday, December 07, 2016
What was discussed at today’s RBA meeting? Were there any changes compared with previous statement?
The Statement from the RBA, while similar to previous statements, did suggest a couple of slight changes at the margin.
In terms of the international economy, the Bank suggested that the disinflationary period of the past few years may be coming to an end. They observed that the inflation outlook is more balanced than it has been for some period.
In addition, global labour markets appear stronger, and the Bank notes the increase in global bond rates following the US election.
The RBA appears to telegraph a lower September quarter GDP print, due on Wednesday, when they comment that growth will likely slow into the year's end before picking up again. Current market forecast suggests that the quarterly print will be low – close to zero.
Such an outcome will see annual growth back around 2.5%, compared with 3.3% in the June quarter. Forecasts for 2017 as a whole suggest growth back towards 3% plus.
What is the RBA’s view on property and outlook for property in 2017?
The RBA highlighted that the housing market is highly segmented – in some markets prices are rising briskly, while in others they are declining – and notes that lenders have begun to decrease their new lending activities in certain segments. In this context, apartments on the East coast come to mind.
The Bank also suggests that market discipline will eventually have an impact. This, when combined with supervisory activities, will likely see a slowdown in market activity and price growth accordingly.
What is the RBA’s view on Australia’s economy and the global economy?
The Bank appears quite comfortable with the economic outlook for both the global and the local economy.
While there may be a dip in reported growth in Australia into year's end, the RBA believes the economy has sufficient momentum to move into 2017 with a strong set of economic fundamentals.
In addition, the “go for growth” strategy espoused by President-elect Trump will likely provide a boost to the US economy and the broader global economy. In this context, commodity prices have been improving through a combination of strong demand and supply reductions, together with anticipating stronger world growth.
What is ING DIRECT’s outlook for the Australian economy, global economy and the Australian dollar in 2017? Can we expect a cash rate rise/cut in 2017?
At ING DIRECT we are reasonably optimistic regarding local and global economic prospects over the year ahead.
We anticipate the US Federal reserve will tighten monetary policy at its December meeting. Progressively, over the first half of 2017, the policy direction of the Trump presidency will become clear. If policy promises match policy actions, a big risk in some key elements, the US economy maybe on a strong growth path. However, it’s at what cost from a budget and broader debt viewpoint.
These elements combined should see a stronger US share market and stronger USD. This risk is that the markets have already factored in these developments and potentially more, therefore the risk is ‘buy the rumour and sell the fact’ after President Trump takes office.
This will likely see the AUD at around current to slightly lower levels over the first half of 2016.
Against the background of stronger domestic and global growth, we would suggest that the RBA will be on hold for much of 2017. The risk is that towards the back end of 2017, pressures may emerge for the RBA to opt for a rate increase.
What does the election of Donald Trump as President of the United States mean for Australia’s economy?
In general terms, it could be a positive impact as it is expected to lead to stronger world growth and, through the flow on effect for commodity prices, boost the domestic economy.
The question will be whether Trump the candidate is different to Trump the president and, if so, what is the impact?
Wednesday, November 02, 2016
What were the main points of discussion at today’s meeting?
The statement today was broadly unchanged from earlier RBA statements. A new element in this statement was reference to the RBA’s forecasts suggesting that the economy is set to grow at close to its potential rate over the next year, before gradually strengthening. Against this background, inflation is expected to pick up gradually over the next two years.
The RBA again referenced that they view their inflation target as a through the cycle measure rather than a target that should be met at all times.
This suggests that the RBA may well be on hold for an extended period, and indeed we may have seen the last of the cuts in the cash rate from the RBA.
Has the August rate cut had any effect?
Usually, interest rate changes take approximately six months to work through the economy, so it is too early to tell if the August rate cut has had a meaningful impact on the economy as a whole.
The May rate cut is working its way through the system and we are starting to see stronger domestic data. Importantly, consumer and business confidence has also moved higher.
Certainly, the exchange rate has not weakened in response to the August cut. As noted by the RBA, a further appreciation of the exchange rate could complicate the outlook for the domestic economy.
What is the RBA’s view on property prices in Australia? And concerns about an apartment oversupply?
The RBA makes the point that there are multiple housing markets within a given city and or state, and as such, they note that the rate of price increases has slowed in some markets, while in other markets, prices have been rising briskly over the past few months.
The RBA again highlighted the potential oversupply of apartments, especially on the eastern seaboard, as an area that warrants close attention. Reflecting the strong role of investors in the markets, rent inflation has been the slowest for several decades.
Did the RBA note the US Presidential Election? What effect could this have on the RBA/Australian economy?
The RBA rarely discusses political developments either in Australia or offshore.
The US elections have attracted significant global attention, and whenever there is a change of leader, there is scope for uncertainty in both financial markets and the broader economy, in this case the US.
Drawing from the Brexit experience, markets are more adept at dealing with surprise outcomes and increased uncertainty.
Regardless of the outcome of the US election, it is unlikely this would have a significant impact in the short term.
What is the RBA’s view on the Australian economy? Is this different to ING Direct’s view? What is the RBA’s view on the global economy and the Aussie dollar? Is this different to ING Direct’s view?
It is very clear that the Australian economy is well along the transition path that has been highlighted continually over the past two years.
Although the exchange rate is well off the recent lows, the lower level of the exchange rate, when considered from a longer term viewpoint, has added momentum to the economy.
The strong performance from the construction sector is providing a solid underpinning for the broader economy. Infrastructure spending is providing a growth dividend for the future.
The recent spike in commodity prices will improve the terms of trade and provide a boost to the income measure of GDP. This has been lagging over recent years as commodity prices have sharply fallen.
It is clear that a lower AUD will aid the domestic economy, however, the improvement in the terms of trade, if sustained, will support the AUD.
When eventually the US Federal Reserve increases interest rates, there is an expectation that the AUD will move lower, however, given this potential is broadly anticipated there may be disappointment at the end of the day.
Global growth could still be considerably stronger, although the US and China appear to be continuing to be expanding at a reasonable pace.
The RBA’s view on both the Australian and global economy appears to be consistent with most observers.
As noted previously, the RBA is looking for domestic inflation to progressively increase over the next year or two as the economy grows at an increasing pace. This would suggest that the RBA will be on hold for an extended period.
Wednesday, October 05, 2016
What were the main points of discussion at today’s meeting?
At his first meeting as Governor, Philip Lowe and the Board of the RBA kept the cash rate unchanged at 1.5%.
The comments following the meeting were very much in-line with recent months, which serves to underline the continuity in the handover from Glenn Stevens to Philip Lowe.
The RBA again emphasised that globally monetary policy remains, and while there is considerable variation in employment growth across the country, the Bank appears confident of continued expansion in employment in the near-term.
Low interest rates have been supporting domestic demand, and assisting the economy to make the necessary economic adjustment, although a further appreciation of the exchange rate could complicate the outlook.
The RBA has suggested that the housing market has started to level off, especially in the apartment space with increased supply coming on stream.
What effect has the cash rate cut in August had?
Generally, when the interest rate changes, it takes up to 6-9 months for the flow-on effect to impact the economy. Equally, there is a school of thought that suggests that lower rates are increasingly less effective at low absolute rates.
Consequently, it is difficult to clearly identify an impact of the August rate cut at this point in time.
Can we expect a rate cut (or rise) this year?
Given the US Federal Reserve is likely to increase rates before the end of the year, and the RBA has cut rates twice already this, we believe it is unlikely there will be a further rate cut from the RBA over the balance of this year.
What is the RBA’s view on the Australian economy? What is the RBA’s view on the global economy and the Aussie dollar? Is this different to ING Direct’s view?
The RBA was guarded in its comments on the future direction of the economy. They suggested that the economy has sufficient momentum at present, with further momentum still to flow through from the mid-year rate cuts. Against this background, it appears that the RBA is content with the level of inflation and employment growth across the economy.
The biggest issue for the RBA is the continued strength of the AUD. It is interesting that as commodity prices went lower over the past two years, the AUD was lagging the decrease in the terms of trade, however as commodity prices have started to move higher over the past few months, the AUD has increased in step. This has the potential to complicate the domestic policy settings in the period ahead.
The RBA is suggesting that increased supply in the housing market, especially of units, is starting to have an impact on rents. This could also reflect the level of investor activity in the market.
The RBA noted that China was growing at a slower rate compared with the recent past, and more broadly, there is considerable capacity in the global economy limiting the inflationary potential in the period ahead.
At ING DIRECT, we would broadly agree with the views expressed by the RBA. Clearly a lower currency would be beneficial, however this is likely to remain elusive in a zero negative global interest rate environment. We believe the RBA will be on hold for the balance of 2016 and potentially well into 2017.
Wednesday, September 07, 2016
By ING Direct's Deputy Treasurer, Peter Casey
My take is that the RBA is really holding out for a lower AUD. Cutting the cash rate has not done much on this front as the AUD is modestly higher than where it sat prior to the May cut.
The main focus over the rest of the year will be on the US and whether the Fed raises the cash rate there.
If the Fed does not hike, then the RBA may well look to cut again early next year. The RBA is mindful that this could put some more fuel on house prices in Australia.
What were the main points of discussion at today’s meeting?
The key points were:
- The global economy is growing at a below-average pace. In particular, Chinese growth is moderating.
- Commodity prices have recovered modestly from the sell-off in the past couple of years.
- The Australian economy is still growing, but with low inflation, there is capacity for faster growth.
Has last month’s rate cut had any effect yet?
- It is too soon to gauge the impact on most measures. The Consumer Confidence number rose slightly, but it usually takes a while for this to translate into activity measures such as Retail Sales.
- The AUD is actually slightly higher than when the RBA cut the Cash Rate last month, which would be a concern.
Can we expect a rate cut (or rise) this year?
- We think the RBA is on hold until at least May next year, but if inflation stays low, then the RBA may look to cut again sooner. However, we think that the RBA would prefer to wait until the most recent rate cuts have had a chance to take hold.
- Also, if the Fed does hike later this year, then the AUD may come under some downward pressure, which will help the domestic economy.
What is the RBA’s view on the Australian economy?
The RBA’s view is that:
- Economic growth will continue as the economy transitions away from the mining investment boom.
- Employment is likely to keep growing in the near term but wages growth is weak.
- Inflation is still low, helped by real wage growth and low cost pressures globally.
- GDP numbers are out today, with expectations that growth will be running just over 3%.
- If GDP is weaker than expected and if CPI remains below 2%, then pressure may build for the RBA to cut rates sooner than expected.
What is the RBA’s view on the global economy and the Aussie dollar? Is this different to ING Direct’s view?
The RBA sees modest growth from the global economy, notwithstanding some bright spots. Importantly for Australia, the RBA mentioned that growth in China is moderating.
- We agree with the RBA’s comments that low-cost pressures from offshore are helping to keep inflation low. This may prompt the RBA to consider cutting the Cash Rate again, but we think that on balance they will keep it steady for the medium term.
- The RBA remains concerned about the AUD remaining stubbornly high – it complicates the current economic transition.
- The most likely prompt for a lower AUD is a hike by the Fed this year. The RBA would probably prefer this to having to cut the local Cash Rate again.
Wednesday, August 03, 2016
What were the main themes during the RBA meeting?
At yesterday's meeting the RBA again cut the cash rate by 25 bps to 1.50%.
The RBA suggested that although the global economy was continuing to grow, however at a lower than average pace, equally, Chinese growth appears to be moderating somewhat. In addition, the US reported weaker GDP at 1.2% at the end of last week. This result was distorted by inventory rebuilding, although consumer spending was very solid at 4.2%.
Inflation and the prospect of inflation remaining low over the medium term prompted the RBA to reduce the cash rate.
The RBA again highlighted that the current level of the AUD is “complicating” the necessary domestic economic adjustments. The prospect of the lower cash rate feeding into a lower exchange rate would have played in the RBA decision. Despite the cut in the cash rate, the AUD was largely unchanged at around .7540 following the announcement.
The currency market response underlines the futility of the RBA, or any Central Bank for that matter, attempting to engineer an exchange rate outcome against the market sentiment.
Importantly, the RBA appears more comfortable with the housing market and the level of activity in the market. The Bank notes that action by APRA is starting to have an impact, as too is the increased supply of apartments and the future supply coming on stream, especially on the east coast; all of which is acting to moderate price pressures.
The RBA is comfortable that the most recent rate cut will aid the economy to achieve sustainable growth, with inflation returning to the target range over time. This suggests that there will be an extended period of inflation below the current target of 2/3%. Perhaps we may see the RBA revise its target range lower, given the various factors driving the current inflation result. The likely trade off if this was to occur is that growth (both actual and potential) would suffer.
What was the RBA’s view on the economic growth data out of the US?
The RBA did not express a view on the US data specifically, rather they noted that global growth was somewhat patchy. As noted previously, the concern regarding the US data released late last week is largely centred on consumer spending being the only bright spot, and as the US heads into an election, the likelihood that consumers will continue to underpin growth is questionable. Equally, given the closeness of the election outcome, the business sector is expected to sit tight until the result is known.
What was the RBA’s view on the consumer price index?
The RBA effectively conceded that inflation has been taken out of the economy with very subdued growth in labour costs and very low cost pressures elsewhere; the outlook for inflation is more of the same for a longer period. This suggests that the RBA may still hold some rate cuts up its sleeve, although at this stage, it appears highly unlikely they would be tempted to use them over the course of 2016.
What would be the impact of a cash rate cut?
In terms of the exchange rate, the impact would be negligible, and in the broader interest rate markets there would be no significant movement, given this reduction was widely anticipated.
Furthermore, with interest rates at the current absolute low levels, further interest rate reductions will likely have a marginal impact, at best. If investment decisions did not make sense at a cash rate at 1.75% there is little evidence to suggest that at a cash rate of 1.5% a real lot is going to change.
What is the RBA’s view on the Australia economy, global economy and the Aussie dollar? Is this different to ING Direct’s view?
The RBA sees the Australian economy in a period of low/no inflation with good growth, although clearly with the capacity to grow faster without creating extreme inflationary pressures. Rather a dose of limited inflation for the economy would be seen as a positive.
Again, the RBA would like to see the AUD lower and more closely reflecting development in the terms of trade over recent years. This has remained elusive and is a major challenge for the RBA in managing the economy. In the past, the exchange rate has been more responsive and has spared the burden falling completely on monetary policy, however, in the current environment of limited fiscal policy flexibility, monetary policy has to do more.
The global economy appears to be giving conflicting signals, strong equity market growth, with declining/negative interest rates. Usually, you would see interest rates respond in light of the earnings growth that equity markets are predicting. This suggests that something is out of alignment and a correction in either market is required.
Wednesday, July 06, 2016
What did the Reserve Bank say in today’s meeting?
As widely anticipated the RBA kept the cash rate unchanged at the record low level of 1.75%.
The RBA appears reasonably content with the current level of activity in the domestic economy, commenting that “holding monetary policy steady would be prudent at this meeting. Further information should allow the Bank to refine policy as may be considered appropriate”.
This is a reasonably balanced assessment of the economy and can be interpreted in a number of ways to support the case for either a potential rate cut in August, following the June quarter CPI print at end July, or doing nothing.
Has anything changed since last month’s meeting? What is their view on Brexit?
In terms of the domestic economy, the position is largely unchanged. The RBA is marginally more upbeat in terms of the export sector, noting that the decline in the exchange rate over the past three years is helping the traded goods sector of the economy.
Like everyone, the RBA’s view on the impact of Brexit is a best guess at this point in time. Their view is that the impact will be largely concentrated on the UK economy itself and broader impacts may be hard to discern.
While this is undoubtedly a true statement at a point in time, the position is highly fluid. For example, a vote in the British Parliament is required during this process, so what happens if the Parliament votes against the referendum outcome?
Recent Presidential elections in Austria will be re-run following a court challenge; in the original vote the nationalist, anti-European candidate came a very close second. A victory at the subsequent election may give rise to further exit discussions.
While the impact of the Brexit decision may initially be concentrated in the UK, a spread of exit sentiment may have broader implications.
Did they comment on the election?
The RBA did not comment on the domestic political status. It would be highly unusual for the RBA to get involved in the political economy; their role is to manage the monetary economy.
While the final result is unknown, it is clear that the Senate will require careful management to ensure the passage of legislation regardless of whichever party forms government. This suggests that the prospect of the new parliament running the full term is significantly reduced.
The rating agencies have commented that the AAA rating of Australia may be at risk if fiscal policy is relaxed and the deficit increased.
Can we expect another rate cut this year?
Market wisdom suggests that following the June quarter CPI, the RBA will lower the cash rate to 1.50%. However, the case for an August rate cut is not as clear cut as the market would suggest. There are a number of factors that may encourage the RBA to keep something in reserve in case events do not unfold as expected.
What is the RBA’s view on the Australian economy, global economy and the Aussie dollar? Is this different to ING Direct’s view?
As noted above and consistent with previous months, the RBA appears increasingly content with the state of the domestic economy.
Against the backdrop of low inflation, they retain the capacity to further adjust rates lower if/when the need arises. In this context, the key indicators will be;
- the end July print of the June quarter CPI change
- ongoing readings on the state of the labour market
- evolving fallout from the Brexit vote
- price inflation and turnover activity in the housing market.
The position on each of these indicators will be clearer by the August meeting, which suggests that a further reduction in the cash rate may be warranted.
The current level of the AUD, albeit lower over the past three years, still has further to go on the downside. The RBA notes that an appreciation of the exchange rate could further complicate the outlook for the domestic economy. In this context, the RBA has clear preference for a lower value of the AUD to share the burden in steering the economy.
Our view is broadly consistent with the RBA’s view. We continue to see solid growth in retail mortgage assets and customer deposits, suggesting that consumers are, by and large, comfortable with their financial position.
Consumer sentiment may be at risk due to the indecision regarding the election outcome, however this should pass once the election result is determined.
The strength of the export sector is perhaps under-estimated within the economy, however the subdued inflation and wages growth environment is not seeing this strength translate through to the income side of the ledger.
Wednesday, June 08, 2016
What did the Reserve Bank say in yesterday’s meeting?
The RBA kept the cash rate unchanged at 1.75% following its meeting earlier yesterday.
The key point in the statement was that the RBA effectively indicated that it was just about done in terms of future rate decreases. In previous months the RBA has ended its comments with words to the effect of “subject to future data, the RBA retains the capacity to further ease monetary policy”, however these comments were missing in today’s statement.
The reasoning the RBA provided was that overall growth is continuing to be strongly positive and various sources of domestic demand, as well as exports, have been expanding at above trend levels.
In this regard the recent stronger GDP data, a sharp rise in consumer sentiment and strong labour market indicators all suggest that the economy has more than ample momentum. In particular the increased export volume phase of the resources boom is starting to more strongly reflect in the growth outcome. In this regard, LNG exports are the standout.
What has changed in this month’s statement changed compared with last month’s statement? What is the RBA’s view on the Budget?
As noted above, the absence of forward guidance suggesting the RBA has further capacity to cut rates suggests that the May decrease may be the last under the current Governor.
This absence reflects the stronger recent economic data that has been released.
Can we expect another rate cut this year?
At this stage, it is difficult to suggest a scenario in which the RBA would feel it is necessary to cut the cash rate again in 2016.
The most likely scenario is that rates remain on hold for an extended period, during which the US Federal Reserve will increase US rates and provide scope for the AUD to ease from around 74 US cents.
What is the RBA’s view on inflation?
The current level of inflation is not a major concern for the RBA. They acknowledge it is low and expected to remain low, given modest growth and labour costs with minimal pressures in the system.
What is ING Direct’s view on the Australian economy, global economy and the Aussie dollar?
We share the RBA view in relation to both the domestic and global economies.
The domestic economy is performing overall quite strongly. While there maybe uneven growth between the export sector and more domestically focussed sectors, the overall economy is growing broadly in line with non-inflationary capacity constraints.
The global economy is providing positive stimulus to the Australian economy through export demand and higher commodity prices.
The RBA will be hoping that the US Federal Reserve shortly moves on US interest rates. The most recent payroll data was weaker than expected, prompting the Fed to delay their adjustment to US rates. Month-on-month economic numbers are difficult to clearly interpret, as a given month may be subject to one-off factors. This suggests there is considerable scope for the data to be revised in the following month.
The Fed may move early in the September quarter, which would provide scope for the USD to move higher, leading to a weaker AUD.
The RBA would like to see the AUD back below 72 US cents at least, and ideally closer or below 70 US cents.
As discussed, it is highly likely that AUD rates are on hold for an extended period with the next move, most probably higher, some stage in the first half of 2017.