RBA keeps the faith - TDS

The RBA in its quarterly Statement on Monetary Policy left its growth and inflation projections unchanged from November, as hinted in Tuesday's policy statement, explains Annette Beacher, Chief Asia-Pacific Macro Strategist at TDS.

Key Quotes

“The Bank believes that current policy settings will achieve above-trend GDP growth this year and inflation back within the 2-3% target band by mid-2019. The only noticeable tweak to the outlook was a ¼%pt lowering of the unemployment rate to 5¼% across the forecast horizon.”

“The underlying inflation forecast of 1¾%/yr in 2018 takes into account the substitution bias reflected in last year's CPI re-weighting. The Bank left the 2%/yr projection for 2019 unchanged, and added 2¼%/yr for mid-2020.”

“The Bank's key concern is how long will wages growth remain this sluggish, where “new enterprise bargaining agreements are tending to incorporate smaller wage rises than the agreements they replace. Other things being equal, this will induce some inertia that will limit overall wage growth for a time.”

“The RBA then uses these slow wages growth concerns to reiterate that a key uncertainty for the outlook remains with the below-trend level of household spending.”

“There was limited commentary on the AUD, with the Bank repeating Tuesday's sentiment that the currency is within recent ranges, and that further appreciation would dampen the outlook for growth and inflation.”

“Renewed financial market volatility sees the AUD end the week at $US0.778, near the lows for the year, and completely unwinding the weak-USD-led rally to $US0.8136 in late January. August OIS was 50/50 for a +25bp hike on Monday, and now closer to 20%.”

“3yr ACGB yields can be expected to pivot around 2% with the 'low rates for longer rhetoric' being loud and clear this week, while offshore developments tend to drive moves in longer end Australian bond yields.”

“There is one hurdle left to reassess our May hike base case: we need a pop in Dec qtr wages growth, released 21 February. While employment growth was very strong in 2017, wages growth has been slow to respond. In our view wages growth is the RBA's #1 policy focus, replacing the exchange rate as the major source of uncertainty for the outlook for growth and inflation.”