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Free AccessMNI 5 Things: RBA Says Higher Rate Appropriate At Some Point
--But No Strong Case For Near-Term Adjustment in Cash Rate
By Sophia Rodrigues
SYDNEY (MNI) - Following are the five key observations we made from the
Reserve Bank of Australia's Statement on Monetary Policy published Friday:
--The RBA didn't incorporate forward guidance in the May cash rate
statement but included in the full policy statement. "If the economy continues
to perform as expected, higher interest rates are, however, likely to be
appropriate at some point," the RBA said. It also added that "Notwithstanding
this, the board does not see a strong case for near-term adjustment in the cash
rate,"
The tweak in forward guidance to add "at some point" suggests the RBA is
keeping open the possibility of raising the cash rate earlier than expected.
This would likely depend on the forthcoming budget and how the labor market and
in particular wage growth, performs versus expectation. On the other hand, the
RBA is also keeping open the option of delaying the hike if lending rates go up
in response to higher funding costs.
--Both headline and underlying inflation forecast for June 2020 were
maintained at 2.25% which is the end period of published forecasts. However, the
balance for risks for inflation appear to be to the upside from retail deflation
and dwelling construction, and also the possibility that wage growth could pick
up quicker than expected. The RBA said outlook for retail prices depends on how
long the structural change underway in the retail sector continues to put
downward pressure on prices. While retailers continue to adopt various pricing
strategies, it is possible that the pace of downtrend in prices could be slower,
especially if the exchange rate remains week. The RBA has noted that despite a
modest depreciation in the exchange rate over the past year, import prices have
been little-changed. In case of dwelling construction, the RBA said the price of
building would depend on how the industry responds to competition for labor and
material inputs from the non-residential construction underway.
--The RBA said GDP growth is currently around estimates of potential growth
in year-ended terms but the economy is not expected to encounter broad-based
capacity constraints for some time. The reason for this is because the RBA puts
lot of emphasis on spare capacity in the labor market and its view remains that
spare capacity will remain even until the end of forecast period. The RBA also
clearly indicated its expectation that unemployment rate indicating full
employment level could turn out to be lower than previously assumed.
--The RBA had a detailed discussion on rise in money market rates and how
it impacts funding costs of banks, wholesale deposits, business lending, hedging
costs and also retail deposits. The RBA said that "there have been few signs as
yet of mortgage rates changing in response to the increase in funding costs,"
but also noted that spread between major banks' lending rates and overall debt
funding costs is estimated to have narrowed recently.
--One of the key risks for RBA's monetary policy is the possibility that
global inflation could be higher than expected which could prompt faster
tightening of monetary policy by central banks and lead to tightening in
financial conditions. For Australia, the risk here is via rise in funding costs
and if this happens in an environment where local inflation is subdued, it could
mean the cash rate would stay on hold for longer.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.