Bill Evans, research analyst at Westpac, explains that the RBA’s December meeting minutes has nominated downside risks to their outlook for the consumer and in February we are likely to see a Bank which is more aligned with trend growth than the current forecasts of comfortably above trend.
“The minutes of the December monetary policy meeting of the Reserve Bank Board reveal a Board which is less confident about the economy than has been the case in the past.”
“In today’s minutes, the issues around slow income growth, high debt levels and falling house prices are explained as being a combination of factors which are posing downside risks to the outlook for the consumer.”
“Accordingly, the minutes affirm “members continue to agree that the next move in the cash rate is more likely to be an increase than a decrease”.”
“In our view, the Bank is now likely to revise down its forecast growth in 2018 from 3.5% to 3.0% (just above trend of 2.75%) in the February 2019 Statement on Monetary Policy.”
The sentiment in these minutes is somewhat less confident about the Australian economy than we have seen in previous minutes, although the outlook for higher rates is once again confirmed. Certainly, at this stage, the Bank cannot be described as having moved to a ‘neutral’ bias. However, taking into account the attention given to the credit; housing; consumer; and external risks, these minutes should be interpreted more ‘dovishly’ than we have seen over the course of 2018.
Westpac has consistently called the cash rate on hold since the August 2016 rate cut in its standard 2-3 year forecast horizon. Markets are now closely priced to our current view that rates will be on hold in 2019 and 2020.
However, traders will want to price-in some scenario for “rates activity”. These minutes are more likely to encourage them to price-in lower rates than the alternative.”
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