RBA Board holds cash rate steady at 1.5% - Westpac

Bill Evans, Research Analyst at Westpac, explains that the RBA’s Governor statement following the May Board meeting to indicates that the Board remains comfortable with its no change policy stance.

Key Quotes

“In fact, relative to six months ago tightening financial conditions; slowing housing markets; and a slowdown in jobs growth gives them even more scope to remain cautious.”

“The Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.”

“We have been interested to follow the various descriptions of the Bank’s growth forecasts over the last few months. These have ranged from “a bit above 3%”; “central forecast remains for faster growth in 2018”; “growth above trend”; and today, “Growth to pick-up to average a bit above 3% in 2018 and 2019”. We will receive an update on the Bank’s growth forecast in the May Statement on Monetary Policy, which will be released on May 4.”

“Commentary in this statement is the same as we have consistently seen with the recent inflation report being described as “in line with the Bank’s expectation”. That would tend to suggest that it will remain cautious around the inflation outlook and forecast 1.75% for 2018. Given that the trimmed mean printed 0.5% for the March quarter, the implication is that the Bank does not expect any marked lift in the quarterly pace through 2018.”

“Commentary in previous statements around the labour market has been unreservedly upbeat. It was therefore interesting to note that the Governor recognised that employment “growth has slowed over recent months”. Nevertheless, the Governor remains confident that solid employment growth will lead to a gradual reduction in the unemployment rate.”

“Sentiment around household consumption “source of uncertainty”; housing markets “have slowed”; and the AUD (TWI) “remains within the range it has been in over the past two years”; is consistent with recent statements.”

“Assessments of the global environment are largely unchanged despite the increase in long-term US bond yields of around 25bps.”

“Conclusion

• We will receive a much more detailed update on the Bank’s views in the Statement on Monetary Policy on Friday. Since the last Statement, housing markets have slowed further; financial conditions have tightened; employment growth has slowed; and equity markets have become more volatile.
• All of these factors point to the Bank having even more scope to remain patient with respect to policy.
• As we have consistently argued since mid- 2017, Westpac continues to expect that the cash rate will remain on hold in 2018 and 2019.”