Saturday, 07 June 2014 09:02

Australian Interest Rates - June Update

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As widely expected, the Reserve Bank Board left the cash rate unchanged at 2.50% at its June policy meeting. The stance more generally was also unchanged with the key closing paragraphs of the Governor's accompanying statement identical to those following the May decision.

The body of the statement had some notable points of change however.

Commentary around the AUD was somewhat more pointed. Recall that the Bank's comments on the currency have seen a significant evolution over the last year with rhetoric becoming particularly forceful late last year, with the level regularly described as "uncomfortably high".

That rhetoric was toned down in Feb following the upside surprise on the Q4 CPI, with the Bank simply noting that the exchange rate remained high by historical standards. We speculated last month that the policy 'comfort' from the weak Q1 CPI might lead the Bank to resume its more pointed commentary on the currency but it chose instead to keep the statement wording unchanged. This month we get a little more elaboration with: "The exchange rate remains high by historical standards, particularly given the further decline in commodity prices". As the RBA has pointed out many times, it is the relativity between terms of trade and exchange rate moves that are key to growth prospects - the tweak suggests the mix of a still fairly stable currency at elevated levels and falling commodity prices is again causing some angst.

Elsewhere in the Governor's statement, the RBA's view on the global backdrop was mixed with prospects for global growth now assessed as "continuing at a moderate pace" but Australia's commodity prices continuing to decline (vs "softened" last month). Global financial conditions were noted as very accommodative with capital flowing freely again to emerging markets, and volatility unusually low - the Bank questioning perhaps the implication that markets attached little prospect to a rise in global interest rates.

There were several points of interest in the Bank's assessment of domestic conditions. Growth was now seen more clearly as having firmed around the turn of the year but this was partly the result of "very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters". ABS trade data out today show net exports made a very sizeable contribution to economic activity in Q1, adding 1.4ppts to GDP growth. Clearly the RBA is not counting on similar outsized contributions in the quarters ahead.

Rather little is made of the recent softening in retail sales and housing indicators with consumer demand still assessed as growing moderately and a strong expansion in housing construction ahead. The recent moderation in dwelling price growth is noted though - a change on last month although a tentative moderation in price growth was referred to in the minutes from the May Board meeting. While not new, the shift in house price momentum may be seen as more convincing and/or significant.

In a similar vein, labour market commentary has also adopted the wording used in the May minutes and Statement on Monetary Policy – where demand for labour being "weak over the past year" has been replaced with the observation that "there has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently.". The key take-out from labour markets continues to be its implication for the continuation of weak wages growth and subdued domestic cost pressures.

There were a couple of notable absences in the June Governor's statement. The sharp pull back in consumer sentiment following the May Budget rated no mention - with the comments from May's Governor's statement that "some indicators of business conditions and confidence have improved from a year ago" simply dropped.

And on business investment there seemed to be little 'buy-in' from the Bank on the improved investment intentions revealed in the Q1 Capex survey. Although these are always open to interpretation, the Banks assessment that "signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative" looks to be a slight upgrade at best on last month's view that "signs of improvement in investment intentions in some other sectors are only tentative".

Conclusion

We never viewed the June RBA Board meeting as 'live', either for a rate move or a significant shift in policy stance. As we have long argued, the evolution of policy from here hinges on the RBA's views around 2015. Recent developments have likely 'cancelled out' in this respect, with a stronger Q1 growth pulse and marginally improved outlook for non-mining capex offset by weaker commodity prices, a patchier consumer and some signs of a slowdown in the housing sector. We continue to expect the RBA to keep interest rates on hold through the remainder of 2014 and much of 2015.

 

Source:  Westpac Economics

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