February 25, 2019

Australian Markets Weekly: RBA – watching world, labour market & consumption

The RBA sees no interest rate rise as likely this year but an increase possible at some stage next year.

For the full picture, download the report: Australian Markets Weekly 25 February 2019



In this issue we cover:

  • The Semi-Annual Testimony to the House Standing Committee on Economics provided further detail on the RBA’s thinking on the economy and monetary policy.
  • The Bank’s core view remains a positive one for the Australian economy, with growth of 3%, inflation of 2% and unemployment of 5%. This is not a negative view, but a less positive outlook than existed six months ago. NAB sees slower GDP growth (2.5%) but broadly similar inflation and unemployment outcomes.
  • The RBA is monitoring an accumulation of downside risks. Globally these relate to a more significant slowing of the Chinese economy than was previously expected, and various political risks (including Brexit, US/China trade and technology tensions; the rise of populism; and strains in a number of western European countries).
  • The outlook for consumption was largely responsible for the recent downgrade to the growth outlook. The Bank sees slow income growth as the dominant feature, rather than falling house prices. It remains closely focused on labour market outcomes, pursuing a strategy of low and stable interest rates which tightens the labour market, causing wages to pick-up, sustaining consumption and lifting inflation. The Governor sees evidence of this strategy working, with wages having picked up a little.
  • Domestically, the Bank is assessing developments in the housing market through the lens of the impact on the outlook on growth, inflation and unemployment, rather than in relation to any particular level of house prices. Indeed, the Bank sees relatively small negative wealth effects in Sydney and Melbourne. And importantly, it characterises developments in housing as “largely the working through of shifts in supply and demand for housing due to structural factors” [NAB: structural factors are not usually easily addressed with monetary policy adjustments!].
  • The RBA sees no interest rate rise as likely this year but an increase possible at some stage next year if the central scenario plays out. If consumption growth is weaker, wage growth doesn’t pick-up and the housing adjustment weighs on consumption more than expected, the Bank may need to consider lower rates. There was also a theoretical discussion of QE – not something the Bank thinks likely to be necessary any time soon. There was no mention of a 1% cash rate as when QE might kick in –  it would depend on the dynamics pertaining as rates were further reduced.
  • Markets continue to price the risk that any near-term move in interest rates is more likely to be a reduction, which seems appropriate to us. There should be strong focus on consumption and income growth in next week’s national accounts. This week’s focus will be on advance US Q4 GDP (Thursday) and the ISM (Friday), Chinese official PMIs (Thursday) and the latest Brexit vote on Wednesday evening Australian time.
  • In Australia, we’ll get an update on the relative trends in housing construction compared to other forms of construction (important to see how much infrastructure spending offsets the housing slowdown), together with latest capex plans for 2018-19 and 2019-20 (expected to remain modestly positive). Credit growth is expected to show another modest +0.3% m/m increase. For full details refer What to Watch.

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