By Michael Witts

What was discussed at the latest RBA meeting? Were there any major differences compared with last month’s statement? 

While the RBA kept the cash rate unchanged at 1.5%, today’s statement contained wholesale changes across a number of fronts. This is in stark contrast to statements issued following the recent RBA monthly meetings.

New key points to emerge include;

  • The RBA has increased their focus on the household sector, and in particular, the impact of the high levels of household debt flowing through to sluggish consumer spending against the background of slow wages growth. “Growth in housing debt has been outpacing the slow growth in household incomes.” This, in turn, leads to potential weakness in consumption.
  • The RBA has upped their comments regarding the exchange rate, suggesting an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

In other aspects, the statement is broadly consistent with sentiments expressed in previous months.

The “Amazon effect” was introduced to the RBA statement, even ahead of their official start in Australia. “A factor working leading to lower inflation is increased competition from new entrants in the retail industry.”

The RBA highlighted that investors in residential property are facing higher interest rates as the tightening of credit conditions following the recent macro prudential measures start to bite.

What is ING Direct’s outlook for the economy, the Aussie dollar and interest rates?

The economy is finely balanced. The recent appreciation of the AUD has the potential to play havoc with the RBA’s preferred path for the economy. As noted above, should the exchange rate remain at current or higher levels, the domestic economy would likely be negatively impacted in terms of growth, inflation and in time, labour market conditions. This could lead to speculation of lower cash rates.

The RBA would intently resist this push as the feedback loop to the housing market would be swift and direct.

Our base case is for the AUD to ease from current levels over the next few months as the interest rate differential towards the USD continues to narrow. The US economy needs to continue to demonstrate ongoing and strengthening growth. The current impasse in the US to enact key elements of the Trump growth platform is holding back further stronger US growth.

The current level of the AUD has more than likely pushed back any upward policy adjustment from the RBA into the second half of 2018. We consider a cut in the cash rate to be a remote chance at this stage, although subsequent events could alter this outlook.