Central Bank Views

RBA Shrugged Off Global Normalization Trend, Maintaining Neutral Stance


The RBA minutes for the October meeting reaffirmed the market that the central bank is in no hurry to increase interest rates. Policymakers stressed that rate hikes, or other kinds of monetary policy normalization, in other major economies do not necessarily imply that the RBA would follow suit anytime soon. The RBA remained upbeat in the domestic economic outlook, staying confident in the employment market conditions. Yet, it was still weary of subdued inflation. As usual, the central bank continued to warn of the strength in Australian dollar.

Notwithstanding rate hikes by other major central banks, including the Fed, BOC and BOE (likely in November), the RBA affirmed that its monetary policy would not be affected by others. As suggested in the minutes, the RBA acknowledged that 'a number of major central banks had either started to reduce the degree of monetary stimulus or were considering doing so' and 'that moves towards higher interest rates in other economies were a welcome development'. However, it emphasized that those moves 'did not have mechanical implications for the setting of policy in Australia, where the timing of any changes in interest rates would be dependent, as always, on developments in domestic economic conditions'.

The members were confident over the employment market situation, noting that 'both full-time and part-time employment had recorded solid growth in August'. Such growth had been 'well above that required to absorb increases in the labour force owing to population growth'. They expected the strength in employment growth to support household spending in the period ahead, although wage growth remained subdue.

Policymakers remained concerned about the inflation outlook as 'recent data had pointed to subdued price pressures across the economy in the June quarter'. Going forward, they projected retail electricity prices 'to increase significantly in the September quarter' while 'liaison with businesses had suggested that a number of firms, particularly in the retail and manufacturing sectors, were largely absorbing increases in energy costs into margins rather than passing them through to final prices'. Aussie’s pullback during the intermeeting period has made the members less concerned about currency appreciation. Yet, they still mildly warned that 'a material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast'.

Besides weak inflation, the less severe increase in property prices has also diminished the urgency of a rate hike. The minutes suggested that 'established housing market conditions had continued to ease in Sydney and Melbourne, but had been broadly unchanged in other cities. This pattern was evident in revised housing price data released by CoreLogic in September, as well as in auction clearance rates. Housing prices had continued to decline gradually in Perth. Nationwide measures of housing prices had increased by around +9% over the year to September'. The RBA likely believes that low interest rates have been less stimulative to properties prices with the help of macro-prudential measures. Should the economic growth continues to evolve as the central bank expected, the policy rate would probably stay unchanged at least until 2H18.