Daily Commentary BY THE CURVE TEAM –

RBA Voices A More Optimistic Outlook

6th of August, 2017

The RBA’s monthly meeting has come and gone for another month. While the cash rate was once again left unchanged, the RBA voiced a slightly more optimistic tone around the outlook. They did note however that risks still remain.

In line with expectations, the RBA decided to hold the cash rate at 1.50% for September. However the rhetoric that came with this month’s statement reflected a more buoyant attitude, particularly around the growth prospects for the economy with Governor Lowe citing that “the central forecast is for the economy to grow at an annual rate of around 3%.” 

As we saw with last weeks Q2 capex data, it is becoming more evident that the Australian economy is making progress in transitioning away from a mining focused economy. This was the other key takeaway point from yesterday’s release, as the RBA’s outlook for the non-mining sector looked more positive.

However, as we have seen in previous months the risks to the outlook still remain. In particular the level of household indebtedness remains a key focus point and despite the recent restrictions on lending imposed by APRA, this will continue to wane on the outlook for interest rates.

In addition, the recent strength of the AUD poses a risk to the outlook. As we have mentioned previously, a stronger dollar could hinder the RBA’s ability to implement monetary policy effectively. Lowe in a speech yesterday evening following the meeting continued to voice concerns citing that “An appreciating exchange rate would not be helpful.

Looking offshore, we had speeches from FOMC Members Neel Kashkari and Lael Brainard overnight which could impact the outlook for the AUD. Both expressed that caution would be the best bet for the Fed in their upcoming rate decisions, with voting member Brainard stating “it would be prudent to raise the federal funds rate more gradually.” A more gradual approach to rate hikes in the US could weigh on USD, putting upward pressure on the AUD, further complicating the RBA’s outlook for rates.

Following on from yesterday’s strong net exports figure, Q2 GDP for Australia comes out this morning and markets are expecting this could have more upside risk to the growth figure. The RBA will be looking carefully to see if the improved outlook was warranted.

Oliver Parsons

Client Relationship Officer