Daily Commentary BY THE CURVE TEAM –

RBA Still Focused On Upside As Rates Remain On Hold

6th of June, 2018

The RBA elected to hold rates at 1.50% as expected yesterday. Their glass half full view of the outlook was on show once again as they continue to take a view on consumers and the housing market as the fallout from the royal commission continues.

The cash rate remained at 1.50% yesterday, a level it has been since August 2016. The RBA remains optimistic that a pick up in growth is coming and it will in turn drive wages growth, boosting consumption and thus providing a sustainable growth profile over the years ahead.

They continue to touch on the downside risks but at this stage feel that they shouldn’t have a meaningful impact on their central forecasts. With the housing market stalling and lending harder to come by, with further tightening of lending standards to come, the headwinds for the consumer appear to be heading in one direction.

While this months retail sales data was a little better than what we have seen so far this year, the divergence between the consumer and businesses are worlds apart. While business profits in the first quarter were solid and their wages bill grew more than 5%, consumers are yet to participate in the upside.

It isn’t just a local issue with reports overnight that the US have asked OPEC to increase production to lower the price of oil as US consumers are feeling the pinch of higher oil prices. Australian consumers are feeling it too with petrol prices at the high point for this cycle.

To me it seems that the risks to the outlook are more evenly balanced than the RBA is currently communicating through their statements. I wouldn’t be surprised if they see it that way too. They can’t really diverge from their current party line without the market suddenly repricing their interest rate expectations and the media jumping all over a negative narrative.

They said in the minutes of their May meeting that “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.” So it seems the RBA will continue to tell us everything will be ok until it isn’t.

Today’s GDP print is likely to be strong and will support the RBA’s current forecasts; however, it is not what has happened but how the outlook evolves over the months ahead that will hold the key.

David Flanagan

Director - Interest Rate Markets