Daily Commentary BY THE CURVE TEAM –

RBA Outlines Key to Monetary Policy Outlook

6th of March, 2019

In what has been a busy 24 hours for the RBA, they have made it pretty clear what they think about the outlook for monetary policy.

Much to the dismay of many economists and commentators who have been calling for immediate rate cuts from the RBA, the cash rate was left on hold again yesterday. Governor Lowe’s accompanying statement was also in line with what we have heard from the RBA over the past month with the outlook still evenly balanced.

In what was interesting timing, the RBA released a short video clip shortly after the meeting where the Governor Lowe outlined the role of the RBA. It seemed to be a not-so-subtle dig at some corners of the market getting overly aggressive in their criticism of the RBA’s current stance of and outlook for monetary policy.

In the video, Governor Lowe reiterated that the RBA has one of the broadest mandates of most central banks. That is they are tasked with targeting low and stable inflation, full employment and to promote the general welfare and economic prosperity of the Australia people.

He added that while their goal is to have in inflation between 2% and 3% that they are able to be flexible with that target.

Based on the current data available, they aren’t doing too bad in meeting their mandate.

Inflation is low and stable, even if it is hovering under the target band. The unemployment rate is at what has long been considered the non-inflation accelerating rate which is also considered close to full employment. Their third mandate can be considered subjective but slowly rising wages and improving housing affordability could be considered to be promoting the general welfare and economic prosperity of the Australia people.

As we know though, there is plenty of uncertainty of what lies ahead. Rounding out his busy 24 hours, Governor Lowe delivered a speech at the AFR business summit this morning titled ‘The housing market and the economy‘ which is definitely worth a read.

He concluded the speech by highlighting the current issues effecting the outlook for monetary policy. He once again pointed out that there are plausible scenarios for the next move in the cash rate being up as well as plausible scenarios for the next move in the cash rate being down.

The key to that next move is the labour market. On the labour market he said that:

“a strong labour market is the central ingredient in the expected pick-up in inflation. We are expecting that as the labour market tightens, wages growth will increase further. In turn, this should boost household income and spending and provide a counterweight to the fall in housing prices. The pick-up in spending is, in turn, expected to put upward pressure on inflation. Of course, it is possible that inflation could move higher for other reasons, although the likelihood of this at the moment seems low. This means that a lot depends upon the labour market.”

This is where uncertainty is growing. A number of leading indicators of employment are starting to turn and point to a slowing in employment growth over the months ahead. That would put pressure on the RBA’s outlook and could see a greater probability that the next move is down not up.

Until such time that the labour market data itself starts to turn, the RBA will sit tight and continue to assess incoming data.

David Flanagan

Director - Interest Rate Markets