Exchange rate, growth concerns for RBA

01 August 2017

No one expected the RBA Board to move the overnight cash rate in any direction at its August meeting. The Board obliged and kept the cash rate at 1.50%. The statement accompanying the decision referred to subdued wages growth, core inflation running below target and an uncertain outlook for consumer spending.

For some time, the RBA has been concerned with the build-up of household debt. It has also regularly made references to the Sydney and Melbourne housing markets which appear to be expensive according to several measures. Both of these topics and the language around each was basically unchanged.

A new topic of concern for the RBA was the rise in the AUD against the USD which occurred after the release of minutes of its June meeting. For all the anticipation about what the RBA would say with regards to the recent rapid movement of the Aussie against the USD, the RBA was refrained. Some economists noted the absence of any attempt to “jawbone” the Aussie to lower levels and the statement simply noted inflation and economic growth would be slower in the presence of “an appreciating exchange rate”.

Here’s what a few economists had to say.

Paul Brennan, Citi

There was a strengthening of the commentary around the exchange rate, which isn’t surprising. The Governor sees downside risks to output, employment and inflation from an appreciating AUD, which he sees as at least partly reflecting the lower USD. In our view the Bank would be particularly concerned if the AUD remains stubbornly high, should the terms of trade decline as the Bank is currently expecting…We continue to expect no change in the cash rate this year and well into next year.

Bill Evans, Westpac

Despite the Governor stating “the Bank’s forecasts for the Australian economy are largely unchanged”, it appears clear to us that it will revise down its growth forecast for 2018 from 3.25% to 3% in response to the rise in the AUD… I am a little surprised that the Bank is likely to take this step given generally positive developments around the world economy, the labour market and business confidence since May… We remain comfortable with our on hold call, and can only conclude from the Governor’s statement that the Bank is not as resigned to a rate hike in 2018 as may have been the case a month ago

David Plank, ANZ

We continue to see the RBA being on hold for the foreseeable future. The rise in the AUD is acting as an additional constraint on early action by the RBA. Having said this, we do think the balance of risks has shifted notably over the past month or so. The high level of business conditions, the related strength in the labour market, the recent gains in consumer confidence and the ever so gradual creep higher in core inflation suggest that the prospect of an RBA rate hike in, say, the second half of 2018 is rising…

Michael Blythe, CBA

The RBA has moved from seeing the higher AUD as a “complicating” factor for the economy to one where “an appreciating exchange rate would be expected to result in a slower pick‑up in economic activity and inflation”.  This addition neutralises the more upbeat labour market commentary and will probably be interpreted as a shift in a dovish direction. Not too much should be read into this dialling up in currency concerns.