RBA: Incrementally more positive - ANZ

Analysts at ANZ explain that while there was little substantive change to the RBA’s post meeting statement, the Bank’s outlook on the domestic economy seemed incrementally more positive.

Key Quotes

“The Bank highlighted the improved investment outlook, both on the private side and the public infrastructure side.”

“The unemployment rate is still expected to decline only gradually, and wages growth to remain low “for a while yet”.”

“The Bank once again noted mixed conditions in the housing market across the country.”

“Statement Details

• The Bank remains positive about the international backdrop, and seems incrementally more confident about the domestic growth outlook. References to the fall in mining investment were dropped, while the Bank noted that “more consistent signs that non-mining business investment is picking up” as well as the fact that a “large pipeline of infrastructure investment is also supporting the outlook”. The outlook for consumer spending continues to be a source of concern with the Bank repeating its comment that “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”.
• Comments around the labour market were little changed, with the Bank continuing to expect only a gradual decline in the unemployment rate and an eventual pick-up in wage growth, although low wage growth is likely “to continue for a while yet”. 
• On the housing front, the RBA is continues to monitor the impact of APRA’s earlier supervisory measures, with the results mixed so far, although there are “further signs that conditions are easing” in Sydney.
• Since the last board meeting in September, we have changed our view on the RBA and now expect the Bank to raise the cash rate by 25bps in May next year, and then again in the second half of 2018. The change to our view reflects an outlook for growth that is a touch more positive than previously and an easing to the downside risks to both growth and inflation. As Governor Lowe noted recently: “A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have.” We expect that by mid-next year, the RBA will feel comfortable reversing the rate cuts implemented in 2016. Our confidence in looking for rate hikes in 2018 is boosted by the hawkish shift in the RBA’s language over the past few months, as indicated by our RBA Bias Index, which continues to point to two RBA rate hikes next year.