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Central Bank Views

RBA Maintains Neutral Bias In March. Fed Funds Rate Hike Alleviates Pressure On Aussie Appreciation

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As expected, RBA left the cash rate unchanged at 1.5% in March. Despite few changes in the monetary statement, policymakers appeared more upbeat on both the global and domestic economic outlook. The major change on RBA's view was on the housing market with the central bank now seeing the conditions 'strong' and prices 'rising briskly' in some markets. On the monetary front, RBA acknowledged further rate hike is coming in the US and 'there is no longer an expectation of additional monetary easing in other major economies'. With no explicit guidance on RBA's monetary policy outlook, we see it maintain a neutral bias with future rate decision dependent on incoming data.

RBA indicated that global market conditions have 'continued to improve over recent months' and 'business and consumer confidence have both picked up'. It also remained cautiously optimistic over China's outlook noting that the country's 'growth is being supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain'. The central bank noted that higher commodity prices have been 'providing a significant boost to Australia's national income'.

Domestically, policymakers acknowledged that 'most measures of business and consumer confidence are at, or above, average', whilst 'consumption growth was stronger towards the end of the year, although growth in household income remains low'. The statement, however, added that 'with growth in labor costs remaining subdued, underlying inflation is likely to stay low for some time'. On the housing market, RBA noted that the conditions 'vary considerably around the country'. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades. Borrowing for housing by investors has picked up over recent months. Supervisory measures have contributed to some strengthening of lending standards.

On the monetary policy front, RBA mentioned that the Fed funds rate is 'expected to increase further' and it is less likely for other major central banks to add more monetary policy easing. We believe further normalization on the US monetary policy should help alleviate concerns over the strength in Australian dollar. For Australia, the central bank judged that the current monetary policy remains appropriate and is 'consistent with sustainable growth in the economy and achieving the inflation target over time'.