RBA preview: Justifiable to sit in its comfort zone of neutrality

The Reserve Bank of Australia meets on Dec 5th, with consensus being unanimous that the benchmark interest rate will remain on hold at 1.5%. 

Downgrade in inflation expectations

In the last month since the last RBA meeting, a key development that only reinforces the perception for the RBA to stick to its long-standing neutral view is the fact that inflation forecasts were downgraded for both 2018 and 2019. The rebasing of the weights in the
CPI by the Australian Bureau of Statistics was what caused the lower threshold established from the original 2 and 2.5% mid-point ranges for 2018 and 2019 respectively.

RBA Governor Lowe has repeatedly said that “inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms inflation is likely to remain low for some time…”

Housing sector an area to keep watching closely

One of the RBA's main concerns, which makes the governing board, understandably, act with substantial caution, lies on the slowdown in household income vs housing debt. With some many negative outcomes throughout history on housing bubbles bursting, the RBA must be able to play its cards wisely, continue exercising close supervision over the macro-prudential measures introduced by APRA while allowing enough room for the sector to keep the economic activity at healthy levels. While there has been a very obvious stabilization in housing prices in key areas such as Sydney, that's not the case in Melbourne, which has experienced further rises in recent times. 

A lower Aussie won't change the picture

Another factor that if anything will assist the notion of a neutral RBA is the action in the Australian Dollar, with the exchange rate experiencing a minor correction in value against the US Dollar, from 0.77 to 0.76 cents. There is little doubt that the RBA Governor Lowe will maintain a pragmatic and familiar approach, repeating the statement that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” 

Investment prospects in the non-mining sector keep improving

Since the last meeting on Nov 7th, we have also seen the publication of the Capex report, with the main takeaway being an upgrade in investment expectations by Australia's corporations. As recently noted by Daniel Gradwell, Senior Economist at ANZ, "overall, it was a positive CAPEX report of the Australian economy for Q3 as investment increased for the third quarter in a row, and plant and equipment spending will support Q3 GDP." The positive outlook was led by the non-mining industries.Given this improving development, it will not be surprising at all if Lowe were to highlight the optimism in the RBA monetary policy statement. In the last one, he stated that “business conditions are positive, with the outlook for non–mining business investment improving.” 

Solid employment market, pleasaant news in full-time jobs 

Conditions in the labor market remain fairly stable, with total employment growth weaker although in the mix it remains relatively solid full-time employment growth. The latest release saw the jobless rate in Australia fell to 5.4% in October, with the economy adding 3.7K jobs, a significant miss on expectations of 18K, with the participation also edging lower to 65.1% from 65.2%. On the bright side, as highlighted, full-time employment rose by 24.3k in October vs 6.1k in September. 

Lackluster consumer spending

Unlike the labor data, which overall has been holding steady, the poor consumer consumption story persists. The latest data showed retail sales at a flat level in September, coming in at 0.0% m/m vs. 0.4% expected and -0.5% previous. The strugle in spending by consumers appears to be directly correlated to more prudent consumers as household debts keep piling up.  

Conclusion 

To sum up, the RBA can justify sitting in its comfort zone of neutrality, with arguments to be made for both a future increase or decrease in rates. On one hand, lower incomes being outpaced by household debt, lower inflation expectations, coupled with sluggish consumer spending are not a 'pretty combination' nor lays the foundation to be overly optimistic. On the other hand, the labor conditions and investment projections are at healthy levels. The RBA can and will find enough reasons to justify further room for future monetary policy considerations; there is essentially zero need to rush. Such stance, unlikely to be altered in the near term, will result in depressed expectations in RBA cash rate changes.