Daily Commentary BY THE CURVE TEAM –

Massive Week for Monetary Policy

6th of August, 2018

If there was ever an opportunity for the RBA to communicate a shift in the outlook for monetary policy, this week is it. With multiple communiques scheduled for release this week and the Governor delivering a key note speech, the platform is set for the RBA should they choose to use it.

The RBA Governor Philip Lowe has stressed on many occasions in recent times the risk to lowering the cash rate further outweighs the potential benefits it may bring. As such, he and the RBA more broadly have continued to push a cautiously optimistic outlook that gradually sees both growth and inflation meet the RBA’s mandate while maintaining financial stability.

Despite the RBA’s continuous reinforcement of the gradual improvement in the outlook and the fact the next move in the cash rate is likely to be up, hasn’t stopped the market discounting such a move. According to the latest market pricing, a hike by the cash rate isn’t fully priced in out until early 2020.

The market is clearly worried about the building headwinds that pose a threat to the RBA’s gradually improving outlook, something that has also been echoed by a number of other economists and market commentators.

Consumers are under increasing pressure with the latest Household Financial Comfort Report showing that households are becoming increasingly concerned with the cost of basic necessities and fuel. It also showed that almost a quarter of household have less than $1,000 savings in cash, leaving them vulnerable to any type of shock.

The risk to growth of a negative wealth effect from falling house prices is growing. The headwinds to the housing market are only just beginning and are expected to grow in intensity over the months and even years ahead. The real litmus test will be the coming spring period when activity is expected to pick up again.

While it is unlikely we will see the RBA do an about face on their current outlook over the course of this week, there is every chance we see a greater focus on the pressures building against their current outlook. Any change to their outlook due to these prevailing pressures will then be reflected in their updated forecasts contained in the Quarterly Statement on Monetary Policy due out on Friday.

David Flanagan

Director - Interest Rate Markets