RBA: Balanced set of minutes - Westpac

Bill Evans, Research Analyst at Westpac, explains that the  minutes of the November monetary policy meeting of the Reserve Bank Board of Australia confirm the confident approach we have seen in the recent Statement on Monetary Policy.

Key Quotes

“While consumption growth is still identified as a source of uncertainty, the Board expects it to remain around the 3% level over the next few years that we have seen recently. Household disposable income growth is also forecast to increase at that rate.”

“GDP growth and labour market conditions had been stronger than the Bank had expected over the last twelve months. Accordingly, the forecast for the unemployment rate had been lowered to 4 ¾ per cent from 5 per cent by mid-2020, with an implied downside risk to that forecast.”

“In that regard, the forecast for inflation has been lifted modestly, reflecting the brighter outlook for economic activity, the labour market and wages.”

“Their discussion around the housing market is a little less confident.”

“The final section of the minutes once again emphasises the importance of wages growth.”

“Conclusion

This is a balanced set of minutes but does indicate more confidence from the Board around its growth, employment, wages and inflation views. The outlook was also boosted by the expectation that consumption and income growth will hold at 3% despite slowing employment growth, and risks around the housing market in Sydney and Melbourne.

By noting that market pricing is not expecting a policy adjustment for the next year, the Bank does appear to be extremely patient with its next policy move. Westpac expects that their growth forecast for 3 ¼ per cent growth in 2019 is too high, mainly because of an expected downturn in residential construction, a slowdown in consumption growth associated with weaker income growth and some wealth effects. That development alone is likely to take the edge off the expectation of rising wages and higher inflation.

We retain our view that the cash rate will remain on hold in 2019 and 2020.”