• RBA cash rate unchanged at 2.50%. Neutral bias remains
• Little change to the press release. Still anticipating that “the most prudent course is likely to be a period of stability in interest rates”
• RBA notes pick-up in inflation but wages outlook subdued. No change to AUD commentary
• RBA on track to keep the cash rate unchanged in 2014. Little change to forecasts anticipated in Friday’s Monetary Policy Statement

The Reserve Bank of Australia made no change to policy at today’s meeting, as expected. There were minimal changes to the press release, and the RBA again concluded that “on present indications, the most prudent course is likely to be a period of stability in interest rates.”

The press release retained a similar focus to recent versions. On economic activity the RBA repeated that export growth has been strong, the outlook for housing construction is strong and consumer demand growth has been moderate. Meanwhile non-mining investment is still only showing ‘tentative’ signs of improvement, so a consistent improvement in the unemployment rate remains some time away.

The only new line in the statement was in response to the Q2 CPI data a fortnight ago. “Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year.” But the RBA seems unconcerned, adding that the inflation outlook remains consistent with the target due to modest wages growth ahead.

The AUD commentary was unchanged, still ‘high by historical standards.’ RBA would be quietly pleased with the past month’s progress.

While they didn’t say so in the press release, the RBA would be feeling slightly better about the economic outlook after some improved data in the past month. On the consumer side we have seen a rise in consumer confidence, personal credit, retail sales and house prices, while business confidence and conditions rose in the June NAB Survey. Employment growth continues to run near 1%yoy (though not enough to stem the rise in the unemployment rate) and the employment leading indicators suggest growth closer to 2%yoy by year end.

The RBA is confident that low interest rates are slowly working through the economy (eg. house prices, dwelling investment and credit growth responding) but the wages and inflation outlook affords them the time to keep policy very accommodative. Only when the RBA is certain that the unemployment rate is peaking, and wage/inflation pressures start to build, will it consider starting the next tightening cycle. Until then, the risk remains for a further cut if activity and employment growth unexpectedly slows significantly.

But it’s looking increasingly likely that the RBA will go through 2014 with no rate change. It’s been a year now since the RBA last moved the cash rate, and there are only four more policy meetings this year (and only one more inflation release in October for Q3). NAB still expects the next move to be up in late 2015.

With the Quarterly Statement being released this Friday, the RBA will provide a more detailed update on the economy. However little change to their economic forecasts is anticipated. The May Quarterly Statement had GDP at 3%yoy in the June quarter (implying quarterly growth of 0.4%) and that looks about right on the partials we have so far, especially net exports which will be a drag on growth. As for inflation, with the Q2 underlying CPI near the RBA’s expectations at 2.8%, the only notable change for 2014-15 will be any adjustment for the abolition of the carbon tax.

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