RBA sounding more comfortable after the August rate cut – ANZ

Felicity Emmett, Head of Australian Economics at ANZ, notes that the recent RBA minutes suggested that the Board generally considers that housing market conditions had eased, even though the RBA dropped the comment about the risks in the housing sector having diminished (consistent with the post-meeting statement).

Key Quotes

“There was also some discussion about the accuracy of lower housing turnover numbers (given the long lag between the purchase and settlement of new homes) and the upcoming considerable increase in apartment supply.

Business liaison suggests some firms had become more wary about hiring. There was a discussion of the full-time/part-time split of jobs in different states, while “liaison contacts … reported that employers more generally had been taking a cautious approach to hiring”. The latter concerns did not change the overall conclusion that the unemployment rate was likely to be relatively stable in the near term.

Outlook

This meeting pre-date the solid Q2 GDP print and Philip Lowe taking over as Governor, where we think Governor Lowe’s parliamentary appearance on Thursday morning will be of more interest to markets.

We expect that Lowe will be relatively upbeat in his assessment of the economy reflecting Assistant Governor’s Chris Kent’s relatively positive speech last week, the changes in yesterday’s Statement on the Conduct of Monetary Policy, and the general tone of recent RBA communications.

We think he will stress that the headwinds from the unwinding of the mining investment boom and falling commodity prices are fading, while the non-mining economy is recovering well. We also think he will forecast a slow improvement in both unemployment and inflation.

While such comments may be interpreted by some analysts as a move to a neutral bias, we would disagree. This is because with average inflation forecast to remain at the bottom of the RBA’s target band for the entire forecast period, we think the chances of the Bank having to cut rates are greater than the likelihood of having to raise interest rates. Moreover, the sustained fall in inflation expectations clearly remains a concern for the Bank.

Notwithstanding the RBA’s inflation forecasts pointing to an easing bias, our central case remains that rates will stay on hold at 1.5%. This assumes that the Q3 CPI will show underlying inflation broadly in line with the RBA’s forecast trajectory, where we think a solid downward surprise would be required to prompt another rate cut. The trajectory of the AUD also remains important to the RBA’s deliberations, where we expect a slow depreciation, as well as labour and housing market data released in the interim.”