RBA monetary policy: Assessing future bias

Reserve Bank of Australia (RBA) chose to keep the interest rate steady at 1.5 percent.

Let’s look at the details of policy announcement to assess the bias of RBA.

Key highlights –

• RBA notes that global economy is growing but now at much slower pace than earlier noted. Acknowledged labor market improvement in advanced economies but deteriorating conditions industrial production and trade. Chinese recent fiscal actions supporting growth in near term but underlying growth moderating.(Neutral bias)
• RBA acknowledged a recent rise in commodities prices but notes that it is much lower compared to years back, so terms of trade is weaker for Australia. (Neutral bias)
• Financial markets functioning effectively. (Neutral Bias)
• Funding cost low for high-quality borrowers as monetary policy globally remains very accommodative.  (Neutral bias)
• Despite weakness in mining investment, it is being offset by other areas of the economy such as trade, residential construction, and public demand. Household and businesses sentiment above average.(Neutral bias)
• Labor market and improvement continue. The Labor market is giving mixed signals but employment expansion likely. There are considerable variations in employment across the country.(Neutral bias)
• Inflation is low and likely to remain so, as labor cost and raw material cost subdued. Expects inflation to strength over next two years. (Neutral bias)
• RBA seems to be less worried on the risks from rising house prices and considered supervisory measures effective. It said that some banks are taking additional caution. It, however, acknowledges the recent rise in prices but confident over upcoming supply. (Neutral Bias)
• Growth in rents slowest in some decades. (Mild dovish bias)
• Low-interest rates supporting economy and banks are in a position to lend for worthwhile purposes. Warns against stronger Aussie.(Neutral bias)
• RBA considers the current monetary policy stance prudent especially after easing in May and August. (Neutral bias)

Monetary policy hardly changed from the previous one. The policy is more tilted towards neutral. That means, no action anytime soon, perhaps the new governor is assessing the situation.

Aussie is trading at 0.766, and we have forecasted Aussie to reach 0.81 against the dollar.