MNI POLICY: RBA Cash Rate Unchanged, Statement More Positive

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia left the cash rate unchanged

at 1.5% Tuesday, the 24th meeting in a row the rate was left on hold, an outcome

that was widely expected by both financial markets and economists. 

     Following are the five key observations we made from the RBA's cash rate

statement:

     --The overall statement struck a more positive tone, with more optimistic

comments on growth, the labor market and global inflation and was in line with

MNI's State of Play published Monday. They suggest the market has been

under-pricing the risk that the RBA could hike the cash rate before the end of

2019.

     --The RBA said that while global inflation remains low, it has increased

due to both higher oil prices and some lift in wages growth. Most importantly

for RBA monetary policy are the additional comments on inflation, saying a

further pick-up is expected given the tight domestic labor markets, and in the

U.S. due to the sizeable fiscal stimulus.

     --The RBA said the economy grew strongly over the past year, increasing by

3.4%. It reiterated the central forecast for growth to average a bit above 3% in

2018 and 2019. Other comments on growth were unchanged and pointed to continued

optimism about the economy.

     --There was a small but significant change in the commentary on the labor

market. The RBA said the "unemployment rate is trending lower and, at 5.3%, is

the lowest in almost six years." Given there were no updates to key forecasts

for the economy, the RBA retained its outlook that further gradual decline in

the jobless rate is expected over the next couple of years to around 5% but this

masked optimism that the 5% level might be achieved much earlier.

     --The RBA didn't appear fazed about the recent hikes in mortgage rates by

three of the four big lenders, and other smaller banks. It pointed to this but

also noted they had reduced mortgage rates for some new loans. The RBA also

reiterated that mortgage rates remain low and there is strong competition for

borrowers of high credit quality.

     --The RBA once again acknowledged the recent depreciation in the Australian

dollar versus the U.S. dollar, noting most other currencies also fell against

the U.S. dollar. 

     --The commentary on the housing market was unchanged, but the RBA noted

that mortgages extended to owner-occupiers remain robust while investor

mortgages have slowed noticeably.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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