Daily Commentary BY THE CURVE TEAM –

Monetary Policy Dynamics Shifting

8th of August, 2017

It has been a very interesting and crucial week for global monetary policy with a number of key developments. While Australia’s monetary policy meeting and subsequent release of GDP was the key local focus, the outlook for monetary policy in a number of jurisdictions is starting to shift.

The big news overnight was Mario Draghi finally conceding that the time to taper the ECB’s QE program is here. While they left current settings unchanged overnight, he indicated that by the October meeting, they would be ready to announce a plan to taper the current asset purchase program. It comes after EU GDP produced another reasonable result, confirming the current emergency setting of monetary policy is no longer required.

The ECB is following in the footsteps of its colleagues across the Atlantic. The Bank of Canada earlier in the week announced its second rate hike in the past three months, taking the cash rate to 1.00%, as it too can no longer justify an emergency setting of monetary policy.

The US has led the way on this front with 4 rates hikes so far. Another was expected by year end, along with the commencement of its QE tapering, potentially as soon as next month. Recent rhetoric from Fed members and a noticeable split amongst the FOMC members at recent meetings has cast doubt over these potential moves. Recent significant weather events only add to the doubt, which could see the Fed take an extended pause on its plan to normalise monetary policy.

Australia and the RBA is finding itself as the outlier as far as monetary policy goes, amongst the major developed nations. While others are looking to remove emergency settings, Australia and the RBA are going nowhere fast. Granted we didn’t need to take things to the extent that others did, but we still face a number of risks to our outlook that will see the RBA on hold for some time.

While the GDP figures were good this week, there is still a very big question hanging over the biggest component of growth in Australia. Consumption growth in the second quarter held up ok but the question is how long can it last. Wage growth remains weak and according to the savings rate from the Q2 GDP figures, consumers have continued to draw down on savings to fund consumption.

With savings only being able to be run down so far, the Council of Financial regulators aiming to slow down the growth rate of debt and wage growth are nowhere to be seen, consumption will continue to come under pressure and with it the outlook for overall growth.

David Flanagan

Director - Interest Rate Markets