Australia's upbeat Reserve Bank lifted cash rate

Australia's upbeat Reserve Bank lifted cash rate again

Click here for the full Note and disclosures.

The RBA today lifted the cash rate another quarter point to 4.0%, the fourth hike since last October, but a resumption of the tightening cycle that unexpectedly stalled in February. We had forecast another “unchanged” outcome today on the basis that, arguably, there is more uncertainty over the outlook now than there was four weeks ago, particularly offshore. It seems, though, that Board members this time are willing to take a leap of faith on Australia’s economy being sufficiently resilient to withstand another small hop towards a “normal” policy stance, and that the “tail risks” overseas are not immediately threatening.

This process of monetary policy normalisation has much further to run; we continue to forecast a cash rate of 5% by the end of the year. Indeed, there is little doubt that Australia’s cash rate is too low, particularly given that our economic caboose increasingly is hitched to Asia’s train. This was, however, equally obvious four weeks ago.

Strangely, there is no explicit mention in today’s statement of the Aussie consumer, despite uncertainty about how the punters were coping with the earlier rate hikes being put forward, for example, in Governor Stevens’ testimony to Parliament on February 19, as a key reason for the RBA being sidelined last month. The fact that the Aussie banks “super-sized” the RBA’s moves means the burden on households was even larger. The banks have done some of the heavy lifting for the RBA.

Click to enlarge

Today’s commentary was upbeat, as you would expect. It is a virtual echo of the tone of last month’s equally optimistic “hike-like” statement, which included everything but the announcement of a higher cash rate. The comments on Australia are a little more upbeat than they were last month – particularly in regard to the investment pipeline and house prices - but the sentiment on the world is a little more downbeat. On balance, then, the tone is about the same as before. The statement described the global recovery as “hesitant” and, for the first time in nearly a year, there was no explicit mention of China, Australia’s single largest export partner.

With some of the key uncertainties yet to be resolved, we look for the next hike to the cash rate to come in May, with officials using the intervening two-month period to gauge how quickly the lingering clouds of doubt are clearing. Any convincing evidence that the clouds have darkened, or that it has started to rain, will see the RBA’s pause last even longer. Alternatively, a run of unexpectedly firm data could see the RBA deliver a back-to-back hike in April. With officials clearly believing that the policy stance remains easy, every meeting from here is “live.” Lingering tail risks, however, particularly offshore, suggest there is no immediate rush to hike again.
We believe the case to hike in February was stronger than it is now. Indeed, since the February announcement, the evidence on how the consumer is holding up has been mixed (today’s data showed a bounce in retail spending for January, but a downward revision for December), issuance of home loans and building approvals have tumbled, and consumer confidence and business conditions have weakened. Also, the offshore dataflow has softened, particularly for the US and Europe, and the evolving sovereign uncertainties continue to hover in the background. Finally, the official forecast is that core inflation in Australia will continue to track lower in coming quarters.

On the flipside, though, employment in Australia unexpectedly bounced in January (even though hours worked tumbled) and last week’s business investment survey was noticeably upbeat, with upgraded spending plans fuelled by booming demand in our major export markets in Asia. The latter, though, should not have been a surprise to the RBA; after all, Deputy Governor Battellino made a speech last week that focused exclusively on comparing this mining boom to earlier episodes. Last week’s capex survey merely endorsed the official assessment that this boom has much further to run.

ENDS

© Scoop Media