Daily Commentary BY THE CURVE TEAM –

RBA Going Nowhere Fast

16th of May, 2018

The minutes from their May Board meeting showed the RBA essentially doubled down on their intention to leave rates on hold. While this sentiment were echoed by RBA Deputy Governor Guy Debelle in a speech yesterday, it is also clear that downside risks are building, threatening the RBA’s outlook.

The RBA’s second last paragraph to the minutes told you everything you needed to know about their outlook. While the board agreed the next move was more likely to be up than down, the minutes then said:

“As progress in lowering unemployment and having inflation return to the midpoint of the target range was expected to be gradual, members also agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, members assessed that while this progress was unfolding, it would be appropriate to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence.”

The addition of those last five words suggest that rates could be on hold for much longer than many people currently anticipate. It also suggest the RBA will wait until there is a clear case to lift rates before deciding on any action.

That notion was certainly made clear by Deputy Governor Guy Debelle who also spoke yesterday. In speaking on the fallout from the current banking Royal Commission, his comments on the implications for consumption delivered a very important message.

On the prospect of higher rates and how they could impact households he said that “in thinking about the resiliency of household balance sheets to higher interest rates, it is important to think about the environment in which interest rates would be rising.” 

Crucially, he then added “that environment is highly likely to be one where wages and household incomes are also growing faster than currently, improving the ability of households to afford higher mortgage repayments.”

It’s confirmation the RBA will not act before there is clear indications that household can handle higher interest rates.

David Flanagan

Director - Interest Rate Markets