RBA on hold at 1.5% in December, sounding optimistic - ANZ

Felicity Emmett, Head of Australian Economics at ANZ, notes that as widely expected, the RBA left the cash rate unchanged at 1.5% for the fourth month in a row.

Key Quotes

“There were a number of changes to the statement, the main ones being around the global inflation outlook, the temporary nature of the weakness in domestic activity, and the acknowledgement of overall strength in housing. We continue to see rates on hold at 1.5% given persistently low inflation.”

“An important change to today’s statement was the comment around global inflation. The Bank reiterated that inflation remains below most central banks’ targets, but added that “headline rates have increased recently” and “globally, the outlook for inflation is more balanced than it has been for some time”. The media release also noted that high commodity prices reflected “both stronger demand and cut-backs in supply” and acknowledged that they would boost national income.”

“The RBA implicitly acknowledged the weakness in Q3 activity, although it implied that the weakness will be temporary, noting that “some slowing in the year-ended growth rate is likely, before it picks up again”. This is consistent with our view that Q3 GDP will be weak (-0.1% q/q), but that the weakness is likely to be short-lived.”

“The Bank’s assessment of housing was a little more upbeat in our view, adding that “conditions in the housing market have strengthened overall”, but reiterating that there is considerable supply due to come on stream over the next few years, which will likely weigh on rents.”

“Outlook

• We continue to think that rates are on hold, but with inflation likely to remain low for some time, we expect the Bank retains an easing bias. The likelihood of the Bank acting on that bias seems relatively low. The comments today around the global inflation outlook, the temporary nature of the GDP slowdown, the pick-up in national income from higher commodity prices, and the slightly stronger tone to the housing comments suggest to us that the Bank would strongly prefer not to cut rates further.
• Tomorrow’s wage data in the GDP report will be important, as will labour and housing market data over the next few months. The business indicators report released earlier this week suggested quite solid growth in the wage bill and by extension a respectable rise in the average wage rate. If this proves to be the case, it would suggest that overall wage growth has bottomed and would make the RBA feel more comfortable that inflation will eventually move back into the target band.”