RBA: on hold, for now

The RBA is the first central bank to get the opportunity opine on the mess in Greece/Europe tomorrow, when it puts out its July policy statement. While the implications for Australia are likely to be very limited (particularly as the market seems to have taken things rather well so far today), it will no doubt get a passing reference.

More importantly for the RBA, the domestic data have been a little confusing since the no change decision in June. Business conditions continue to bounce around their long-run average, but consumer sentiment has fallen back sharply.

RBA preview July

At the same time, the residential housing market continues to boom in Sydney, while being somewhat more contained elsewhere. The boom in both new dwelling approvals (up over 20% on a year ago) and existing home prices will continue to weigh on the RBA’s mind with policy rates already at an all-time low. But I expect the RBA (along with APRA) will be looking at further tightening of macroprudential measures, rather than altering the course of monetary policy at this stage. (That said, I attended a lecture by Gov Stevens last week, where he once again outlined his general view that macropru may not be sufficient in dealing with financial stability issues, but rather in combination with monetary policy – see here.)

Somewhat surprisingly, the latest labour market data also showed some further improvement. The noise in the headline seasonally adjusted data has meant that the RBA has focused more on the trend over the past year or so, but it also seems to have stopped worsening (for now).

Looking back to the key domestic para in the last statement, you would be hard-pressed to see much change in the language:

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

On the exchange rate, it has fallen around 2.5% since the June policy meeting. While that decline is welcome, it still isn’t enough given the decline in commodity prices. Of course, immediately after the June policy statement the AUD rallied on disappointment at a lack of forward guidance on further rate cuts. Much of that was soon unwound (with the minutes and speeches), but there is probably some risk again this month an easing bias is not re-introduced.

I suspect that Stevens may well think that this month is a good example of something he alluded to in his recent speech:

Countless market and media antennae are trained on the sound of the central bank voice, trying to discern and amplify signals out of all the static around, even when the central bank has no new signal to send, and static is all there is.

That leaves the RBA on hold, for now at least. I still think that one more cut is likely this year, but that will probably be it.


Somewhat remiss of me not to mention China. Clearly there are some issues around the stock market, and the policy makers are now stepping in to try to stabilise things. But I doubt this will be a big deal for the RBA, unless it looks like it is becoming systemic (not impossible given the leverage apparently used). Rather they will be concerned about the ongoing slowdown in activity there, and whether it remains steady.

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