Daily Commentary BY THE CURVE TEAM –

RBA Holds Course

6th of February, 2019

There was plenty of headline grabbing and hand wringing yesterday following the RBA’s statement however it was straight from their long standing playbook.

After a run of very weak data since December, the market was baying for blood when the RBA met to discuss monetary policy yesterday. The market has swung from expecting a rate hike to expecting a rate cut over the past three months and some commentators and economists have ratcheted up calls for rate cuts.

The problem is that many of them are playing the ball not the man.

In their statement yesterday, the RBA acknowledged that the risks to the outlook have changed since they last met back in December last year. On the international front, Lowe said in the statement that “the outlook for global growth remains reasonable, although downside risks have increased.”

It was a similar story for the domestic outlook where “as is the case globally, some downside risks have increased.”

Despite the increase in downside risks, the RBA still remains cautiously optimistic and gave some valuable insights into what to expect when they update their forecasts in Friday’s Quarterly Statement on Monetary policy with yesterday’s statement saying that:

  • “The central scenario is for the Australian economy to grow by around 3 per cent this year and by a little less in 2020 due to slower growth in exports of resources.”
  • “A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years.”
  • “Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected”

This is straight from the RBA’s playbook. Why spook the horses? Everything is fine until it isn’t and when it isn’t they will act accordingly.

They did give us a clue as to what might tip them towards shifting their outlook. Consumption has long been the biggest risk to the outlook and yesterday’s statement added a bit of colour on what keeps them up at night:

“The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.”

So far the RBA isn’t too concerned with the pull back in house prices with the statement saying  that “the housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices.” Given Governor Lowe’s penchant for financial stability, this is a welcome development.

The key remains how and when this impacts the broader economy and the RBA’s focus is squarely on consumption.

For now though our focus will shift to Lowe’s speech today at the National Press Club before he releases the RBA’s Quarterly Statement on Monetary Policy on Friday.

David Flanagan

Director - Interest Rate Markets