RBA keeps cash rate on hold; hints at lower growth forecast - Westpac

According to Bill Evans, Research Analyst at Westpac, Australia’s Board of the Reserve Bank left the cash rate unchanged at 1.5% on expected lines and the Governor’s Statement was mildly dovish implying a downgrade in the growth forecast and recognising some tightening in financial conditions.

Key Quotes

“In today’s statement the Governor referred to the central forecast being for faster growth in 2018 than the 2.4% in 2017. With this change in stance around the growth outlook, it is reasonable to assume that the next set of growth forecasts for 2018, which will be released on May 6 with the May Statement on Monetary Policy, will be for a lower forecast than the 3.25% we saw in February.”

“The second important observation around today’s statement relates to the Governor’s decision to note the tightening in financial conditions associated with the increase in USD short term interest rates, which he notes has flowed through to higher short term rates in some other countries including Australia. He makes no observation as to the likely implications of such a development including not speculating that this development will be temporary. Note that the critical short-term rate for banks is the BBSW which has risen around 25bps to above the usual margin over the risk free rate.”

“For some business borrowers, that is likely to mean the equivalent of a 25bps rate hike. Although there has been no flow on to mortgage rates.”

“The commentary around the real economy is largely unchanged. The lift in consumption growth in late 2017 is noted, although the Governor still describes consumption as “one continuing source of uncertainty”.”

“Despite the AUD having fallen from a peak of 65.7 (TWI) at end January to 62.3 (latest), the commentary around the Australian dollar is unchanged – “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.”

“Conclusion

Whereas some previous statements from the Governor could have been interpreted as mildly optimistic, there is nothing in today’s statement to fit that description. There is some uncertainty around the immediate growth outlook, while tightening financial conditions are noted. A slowdown in improving labour market conditions is observed while the outlook for consumption remains uncertain.

Westpac has no reason to change its current view that the overnight cash rate will remain unchanged for both 2018 and 2019.”