Daily Commentary BY THE CURVE TEAM –

Next Cash Rate Move Up, But When?

22nd of November, 2017

The RBA has remained at the front of everyone’s mind over the past 24hours following the release of the minutes of the November board meeting as well as a key speech by Governor Philip Lowe overnight. All rhetoric points towards a patient approach to monetary policy adjustment while uncertainties continue to loom.

The minutes of the RBA board meeting in November contained no real surprises with the temper continuing to be subdued. There was the usual upbeat tone around business investment and strong employment conditions while concerns around the consumer and household indebtedness remain.

Uncertainty around wages growth and inflation continue to puzzle the RBA, with the minutes noting that the lack of wage pressures may be more structural in nature. The minutes noted

The possibility that globalisation and technology were leading wage growth to be less responsive to changes in the demand for labour.

The minutes certainly reflect the view that there is no expectation that rates will be on the move in the near term.

A theme that was further reiterated by RBA Governor Lowe. Speaking overnight on “Some Evolving Questions”, Lowe painted a pretty clear picture of the state of the economy and the number of uncertainties that we have been watching carefully over the year.

One of the trends this year has been around how the economy is transitioning away from a mining centric economy. While it has been fairly arduous process, the transition looks to be making its way around the final turn as the level of mining investment continues to normalise and employment conditions are strengthening in other industries.

Lowe was upbeat in the shift as the negative necessary repercussions look to be fading, he noted that

The fading of the negative spillovers is one reason why growth in the Australian economy is expected to strengthen over the period ahead.

That being said risks still remain particularly around a lack of wage pressure and the burden it is having on already highly indebted households. Lowe pointed out the impact on consumers as spending continues to miss the mark, citing that

The picture is pretty clear. For some years, consumption growth has been weaker than forecast and it has not exceeded 3 per cent for quite a few years.

This lack of consumption demand coupled with the degree in slack in the labour force is resulting in a lack of inflationary pressures. Similar to what we heard in the minutes, Lowe pointed out that a change in structural dynamics of the labour market is implying that the “economy is less inflation prone than it once was.

That being said the expectation still remains that the labour market will tighten to the point where we see a lift in wages. Lowe pointed out that the economy still has a little way to go before it reaches full potential and hence “inflation is expected to pick up only gradually and remain below average for some time yet.

This comes in line with our view that it is likely the next move in the cash rate will be up. That being said it looks like patience will continue to be exercised despite other central banks moving away from accommodative settings and hence it could be some time before we see that cash rate lift.

Oliver Parsons

Client Relationship Manager