Bank Holds Fire

The Reserve Bank of Australia left the cash rate unchanged at 1.5% in November, underscoring what is likely to be period of stable monetary policy into early 2017.

 

The central bank's commentary on inflation and commodity prices was little changed from October. The RBA did acknowledge a slowdown in employment growth, however, which is a slightly dovish development.

 

The bank described inflation as “quite low” and “…expected to remain low for some time", but left its commentary on commodity prices unchanged despite recent surges in key commodity prices, particularly coal. A dovish interpretation of this suggests the RBA sees recent commodity price strength as transitory, with few consequences for growth and inflation.

 

Indeed, the RBA indicated that growth and inflation forecasts to be updated in Friday’s Statement on Monetary Policy would be little changed from those published in August, implying it sees little lasting impact from the recent commodity price moves. 

 

On the labour market, the central bank explicitly acknowledged that “…employment growth overall has slowed”. This is a modestly dovish change, but is somewhat offset a little by the repeat observation that “…forward-looking indicators point to continued expansion in employment in the near term”

 

Staying on hold into 2017 would give the central bank more time to consider housing market trends, the sustainability of commodity price rises and labour market dynamics. That said, the near-term policy outlook is still predicated on inflation (or a lack of it), and recent September-quarter data confirmed the weak underlying trend in the bank's preferred measures of inflation.

 

Given that CPI data is suggesting structural disinflationary forces are more prevalent than expected, Ord Minnett still forecasts an interest rate cut of 50 basis points, or 0.5 percentage points, in the first half of 2017.

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