Daily Commentary BY THE CURVE TEAM –

Caution Reigns as Markets Stabilise

7th of February, 2018

Caution is the word of the day as markets have stabilised following the wild price action the previous night. Caution was also the core theme emanating from the Governor Lowe yesterday in his completely re-written statement accompanying the decision to leave the cash rate on hold.

The new year saw a completely new statement from Governor Lowe yesterday after the RBA elected to leave the cash rate on hold as expected. While there was a move away from the largely carbon copy monthly statements we had become accustomed to, the core narrative saw only a mild shift in tone.

There was still optimism around the outlook for growth, supported by the bulk of the data that has been released since the December meeting. It also suggested that we are unlikely to seen any seismic shift in the RBA’s growth forecasts when they are updated in this Friday’s Quarterly Statement on Monetary policy.

Concerns that were prevalent in the December statement remained. Despite the pick up in consumer sentiment over the past two months, the RBA still says there is continued “uncertainty” over the outlook for consumption.

They key however was the increased emphasis on the outlook for inflation. In the closing paragraph, the RBA said that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

The key word there is gradual, which indicates the RBA will be in no rush to make any adjustment to the cash rate.

The final point to note is the ongoing warning about the currency, where “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

So the wash up is that the inflation outlook and more specifically wages are the key indicators to watch. Until we see a pick up in the wages pulse, the RBA seems content to sit pat.

David Flanagan

Director - Interest Rate Markets