Australia’s Reserve Bank Board assembled today and decided to leave the cash rate at 1.5% (where it has been since last August), as all surveyed economists had anticipated. There was very little prospect of the Bank doing anything on policy today, particularly with last week’s National Accounts having shown that growth in the economy bounced back strongly in Q4, following the shock contraction in the previous quarter. The rebound in growth, in fact, was firmer than the RBA’s published forecasts had implied.
Today’s statement announcing the decision was a virtual “cut and paste” from a month ago, with only a few tweaks here and there. Officials made no specific mention of the stellar headline GDP result revealed last week, nor of the underwhelming business investment report from the week before. The discussion on housing sounded familiar, with a repeated acknowledgement that house prices are rising “briskly” in some markets, but falling elsewhere. Similarly, there remain big regional differences in labour market conditions, as before.
In summary, judging by the tone of today’s statement, RBA officials are pretty content with the current stance of policy, which they believe “would be consistent with sustainable growth in the economy and achieving the inflation target over time”. This non-committal guidance at the end of the statement was very similar to that of a month ago, except that the Bank removed the previous reference to the easing of monetary policy in 2016, presumably because those rate cuts are receding into the rear view mirror.
All the while, though, RBA officials are engaged in a delicate balancing act. On one hand, a case could be made for easier policy on the grounds that key parts of the economy are weak and inflation continues to track below the RBA’s 2-3% target range. On the other hand, though, housing markets in the major east coast cities continue to strengthen, frothiness that almost certainly would be exacerbated by further rate cuts. It seems these housing-related financial stability risks have gained prominence lately relative to underlying concerns about persistently low inflation.
In terms of what happens from here, pricing in financial markets now implies that it is all but certain the cash rate will be higher by the middle of next year, although a small number of market economists still expect a rate cut in the interim. Even easier policy, though, would require something to have gone seriously wrong with the economy, particularly with the cash rate already sitting at half the “emergency” level set during the darkest days of the global crisis. It seems more likely that the next move from the RBA will be a rate hike, albeit not until 2018.