Daily Commentary BY THE CURVE TEAM –

RBA Plays Waiting Game

2nd of May, 2018

The RBA’s monthly board meeting has come and gone again and for 21 months it has remained unchanged. While the usual small adjustments were made to the accompanying statement, the key message remains the same. This was supported by Lowe’s follow up speech in Adelaide overnight.

The RBA’s outlook, which will be once again reflected in Friday’s updated forecasts in the quarterly SoMP, is one that is of a glass half full. It is hard to argue with, given the developments in recent times, even in light of the ongoing risks that pose a threat to the outlook.

Governor Lowe and his colleagues still believe that growth will continue to pick up to just above 3% over the coming years. This growth should help to eat into the spare capacity still in the economy, pushing up wages, and subsequently underlying inflation.

Be keeping the cash rate unchanged and a very stable outlook, he is also buying time. As other developed nations look to remove emergency settings and in some cases, tighten monetary policy, falling yield spread are driving the AUD lower.

A lower currency not only helps a number of key sectors in the economy, including exports and tourism, but helps on the inflation front too. This buys the RBA time.

The risks of leaving the cash rate too low for too long are diminishing. APRA’s previous efforts to reign in debt growth, the increase scrutiny on banks and rising funding costs are all acting to constrain lending growth in a number of different ways. This is something that is more likely to continue rather than ease back, which will also give the RBA more time.

It won’t be until we see wages growth pick up that the RBA will even consider a change in the outlook for policy. If anything, the RBA has the leeway to let the economy run hotter for longer before it needs to take its foot off the accelerator.

David Flanagan

Director - Interest Rate Markets