RBA sees some better signs, but AUD and unemployment still too high

• RBA cash rate unchanged at 2.50%. Neutral bias remains
• Still anticipating that “the most prudent course is likely to be a period of stability in interest rates”
• Some better signs for confidence and capex intentions, but unemployment and the AUD still too high
• RBA in no rush to move rates. NAB still expects next move in late 2015

For the 13th consecutive month the RBA has kept the cash rate unchanged at 2.50%. They are still on a neutral bias, and there was no meaningful change to the overall tone of the Statement. The RBA again concluded that “on present indications, the most prudent course is likely to be a period of stability in interest rates.” They still believe that policy is accommodative enough to support better growth, with house prices and credit growth the clearest signs that low interest rates are slowly working.

This month they also observed that business conditions are improving, and household sentiment is off its recent lows. Non-mining investment intentions also continue to slowly improve.

But the overall outlook for growth remains below trend for the year ahead, and downside risks remain. The rise in the July unemployment rate was noted, and the RBA still expects it will be some time before the labour market improves. Meanwhile the AUD continues to frustrate the RBA, although there was only a slight change to the commentary. The RBA said the exchange rate “remains above most estimates of its fundamental value” from the previous month’s line that it was “high by historical standards.”

RBA in no rush to change the cash rate

The RBA’s commentary largely reflects the slightly better run of data in the past month. The non-mining capex expectations improved in the Q2 Survey, business conditions and confidence in the NAB Survey continue to trend higher, and rising house prices are contributing to more construction activity for residential dwellings. The credit data are also slowly responding to lower interest rates – business credit has risen in each of the past 10 months.

But one key exception is the unemployment rate. Employment growth at 0.9%yoy is not strong enough to reverse the rise in the unemployment rate which is now at 6.4%. Until we see more business investment spending and increased hiring there is the possibility of even higher unemployment and the RBA has previously said they do not expect a sustained labour market improvement until 2016.

Amid these mixed indicators, the good outlook for wages and inflation allows the RBA to keep policy very accommodative to support confidence and economic activity. Only when they are certain that the unemployment rate is peaking, and wage/inflation pressures start to build, will it start considering a rate hike.

NAB still expects the next move in the cash rate will be up, but not until late 2015.

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