CANBERRA: The Reserve Bank of Australia has left rates on hold at its second board meeting of the year, amid contrasting signs on the strength of the local economy. The central bank met expectations by leaving the cash rate at the record low 1.5 per cent, the level at which it has remained since August. A sixth straight hold follows on the heels of two cuts in swift succession across May and August that had forced some economists to ponder the potential for quantitative easing (QE) measures, given there was little room for further cuts. Ahead of today’s meeting the market was pricing in just a 0.4 per cent chance of a cut, with a hike not even viewed as a possibility. The RBA’s March statement almost exactly mirrors its February update, with the central bank offering little insight as to its current policy bias. The Australian dollar settled higher on the update, trading at US76.25c by 3.45pm (AEDT) after hovering at US76.05c just prior to the release of the RBA statement. The lift in the unit’s value came as traders raised their bets on the easing cycle being in the rear-view mirror. The decision to maintain rates at current levels comes as the labour market, inflation and wages growth continue to stutter at the same time that growth has recovered, housing prices continue to surge and business and consumer confidence hover around multi-year highs. It leaves the balance of risks finely balanced for the RBA, with economists split as to whether the central bank’s next move will be up or down. Traders have been willing to take a punt, however, tipping the next shift in the cash rate to be higher, even if it may wait until next year.
Ahead of today’s meeting, futures pricing showed the chance of a hike before year’s end at 29.9 per cent, while the chances of a cut were seen at a meagre 3.4 per cent. Those percentages have moved slightly since the RBA statement, with the prospects of a 2017 hike raised to one-in-three, while a cut is now seen as a 3.3 per cent chance. Core views on inflation, the housing market and labour force remained broadly in line with last month, the RBA statement showed. “With growth in labour costs remaining subdued, underlying inflation is likely to stay low for some time,” RBA Governor Philip Lowe said. “Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent, with the rise in underlying inflation expected to be a bit more gradual.” The only slight tweak on labour market commentary came around the composition of recent job gains, with Dr Lowe noting employment growth had been “concentrated in part-time jobs”. This served as a point of difference to last month when the RBA was pointing to fulltime employment growth turning positive late in 2016. The most significant fresh commentary came on local economic growth as the RBA digested the latest GDP report for the December quarter, which showed quarterly expansion of 1.1 per cent on the heels of a 0.5 per cent contraction in Q3.
“Exports have risen strongly and non-mining business investment has risen over the past year,” Dr Lowe said. “Most measures of business and consumer confidence are at, or above, average. Consumption growth was stronger towards the end of the year, although growth in household income remains low.” In the prior month the central bank had noted the soft growth outcome in the September quarter, but had tipped a return to “reasonable growth” in Q4. Beyond that, the central bank reiterated a warning an appreciating exchange rate would “complicate” the adjustment from the mining investment boom, while again noting the dichotomy of performance in the nation’s property sector as prices in the east coast capitals swell. “In some markets, conditions are strong and prices are rising briskly,” Dr Lowe said.
RBC Capital Markets’ Su-Lin Ong noted an “upbeat tone” in the report but stressed a need to closely consider crucial inflation and labour market outlooks when painting the picture for future monetary policy bias. “While the wording is largely unchanged we think the commentary around the labour market, wages and inflation should not be overlooked,” she said. “They continue to capture a sense of uncertainty over labour market outcomes and the composition of job creation which is intertwined with weaker than expected wages growth and a slight nudging down of the RBA’s core inflation forecasts over the medium term. “With the wage/unit labour cost dynamics likely, in part, to capture a structural element and need for Australia to be more competitive, the risk is for sub target core inflation to persist for longer than expected.” Westpac chief economist Bill Evans is also of the view market pricing on future rate moves appears off the mark, tipping a neutral RBA for the foreseeable future. “Last year we predicted a rate cut in August to be followed by an extended period of steady rates in 2017 and 2018.,” he said. “Markets were unconvinced and priced in at least one further rate cut. That pricing has now been replaced with nearly two rate hikes in 2018. “We do not expect that the Australian economy will be sufficiently robust in 2018 to justify a return to a tightening cycle and continue to forecast rates on hold in 2017 and 2018.”