The RBA kept rates on hold at 1.5% at their November meeting in line with broad market expectations. Having previously cut rates twice in the year at the August and May meetings, only a small portion of forecasters were looking or a rate cut at this juncture.
The statement accompanying the decision was relatively unchanged from last time around with the bank striking a broadly neutral tone with a “weak easing bias”. Indeed, the concluding paragraph of the November statement was identical to October’s noting “that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
Key Changes To Statement
In terms of changes, key additions included a slightly more positive sentiment on growth in China as well as Australian house prices over recent months. Negative changes were aligned mainly to Australian labour market conditions with the bank noting that over-all jobs growth (not just full time) had slowed. The global economy was regarded as “continuing to grow at a lower than average pace”.
Labour markets in advanced economies were noted as improving but balanced by subdued “growth in global industrial production and trade” whilst “Inflation remains below most central banks’ targets”. Referring to China, the bank noted that conditions…have steadied recently”. This was a clear improvement from last month’s comments on the country which simply noted that “policymakers have been supporting growth”.
In terms of the domestic situation, the RBA noted that “the economy is continuing to grow at a moderate rate” with the large decline in mining capex “being offset by growth in other areas, including residential construction, public demand and exports”. In terms of the labour market, the RBA noted that although jobs growth “overall has slowed”, “forward-looking indicators point to continued expansion in employment in the near term”.
In reference to the housing market, the RBA noted that “supervisory measures have strengthened lending standards” but conceded “prices in some markets have been rising briskly”. This new description is clearly a development from last month where prices were simply noted as having “strengthened”.
Regarding inflation, the bank noted that the recent Q3 CPI print was “broadly as expected…with underlying inflation continuing to run at around 1.5%” and is “expected to remain low for some time”. In terms of the currency, the RBA noted that the “lower exchange rate…is helping the traded sector” but retained the Dovish line that “an appreciating exchange rate could complicate this”.
Market Reaction
The market reaction to the meeting was AUD positive with AUDUSD trading around 60 pips higher. The broadly neutral tone of the statement has once again tempered RBA easing expectations with markets no longer expecting the bank to move again on rates this year. The RBA also flagged “little change” to their medium term SOMP forecasts to be released this coming Friday. The bank noted that “the economy is forecast to grow at close to its potential rate, before gradually strengthening…Inflation is expected to pick up gradually over the next two years”.
With 1.5% being the lower bound of each inflation forecast until the end of 2018, the RBA seems to have clearly drawn a line in the sand at this level. In terms of the bank’s next steps, it seems that only a move below that level is likely to draw the bank back into further easing action whilst inflation at or above that level is likely to see the bank continue to remain on hold. With US rate hike expectations firming up heading into the year end the bank’s “on hold” status is further supported which for now is likely to keep AUD underpinned.
AUDUSD continues to challenge the descending trendline resistance which has capped price since April this year. A break above this level suggests a continuation of the broad bullish channel which has framed price action over the last year.