RBA holds, no rate rise until late 2018

03 October 2017

The October meeting of the RBA Board is not one of the four months of the year traditionally associated with RBA rate changes. The months in which many rate changes have been made are February, May, August and November. The rationale put forward by economists is these are the months which follow the quarterly releases of CPI figures which may indicate growing inflation pressures.

At the moment there are few signs of growing inflation in Australia, although the latest Melbourne Institute inflation figures may prove to be one of them. So it was not a surprise the RBA kept the official cash rate at 1.50%. Prices of cash futures contracts prior to the meeting had implied a near-zero chance of a move by the central bank, so any other result would have been a great shock.

There statement which accompanied the decision is essentially the same as September’s statement and economists generally viewed it as indicating the RBA is still in a neutral position. While the RBA currently views the outlook for the global economy as positive for the domestic economy, domestic consumer spending and household debt appear to be concerns for the Bank. Employment growth is expected, but not enough to do anything other than “gradually” lower the unemployment rate “over the next couple of years.” As far as the RBA is concerned, the pros and the cons are roughly balanced at the moment.

Here’s what a few economists had to say about the decision.

Bill Evans, Westpac

As we have consistently argued, it appears that the Bank is expecting to raise rates sometime in 2018. With conditions in the housing market easing, and inflation and growth remaining sub-trend, there is no immediate urgency to move any sooner. However, we expect that as 2018 unfolds, the Bank will deem it necessary to revise down its growth assessments and continue to rely upon macro-prudential policies to contain any further lift in the household debt to income ratio. We continue to expect that rates will remain on hold in 2018 and 2019.

Felicity Emmett, ANZ

While there was little substantive change to the RBA’s post meeting statement, the Bank’s outlook on the domestic economy seemed incrementally more positive.

George Tharenou,  UBS

“Looking ahead, we still expect the RBA to stay on hold until 2H-18, with Q3 CPI, due October 25, the next key data…while more broadly they assess the impact of macro-prudential policy tightening on housing and the extent to which better global growth leads to faster domestic activity and inflation. We think this suggests a lack of urgency to hike rates near-term, given no explicit tightening bias which is normally a first step before actually hiking.

Adam Boyton, Deutsche Bank

As was widely expected, the RBA left the cash rate unchanged at 1.50%. The overall sentiments in the statement were, in our view, little changed – although relative to market pricing the lack of a more hawkish tone suggests that the Australian front-end might have gotten a little ahead of itself when it comes to the 2018 outlook.

Daniel Blake, Morgan Stanley

We see slower housing and weak consumption leaving the RBA on hold through 2018 – especially given the crunch for discretionary spending between flag average wages, rising essentials costs and tightening credit conditions. Meanwhile, the rise in leverage and a market-[driven] and regulatory-driven repricing of mortgage rates means a hiking cycle has already started. As such, the pricing of an RBA policy cycle for 2018 looks pre-emptive, and draws too much on the surprise shift by the Bank of Canada.