RBA to keep rates on hold; retain upbeat growth forecasts – Westpac

The Reserve Bank Board of Australia next meets on August 1 and is likely to keep rates on hold as clearly signalled by important speeches from both the Governor and Deputy Governor over the last week, according to Bill Evans, Chief Economist at Westpac. Therefore the interest directly associated with the Board meeting will be with the Governor’s associated Statement, he further adds.

Key Quotes

“No doubt the Governor will continue to “call out” the labour market and the housing markets as the key areas of interest. In that regard the sentiment in the July Board Minutes and the Governor’s July Statement is likely to be repeated.”

“And then, of course, there is the Australian dollar. Since the last Board meeting the AUD has increased from USD 0.76 and a TWI of 65 to USD 0.795 and TWI of 67.”

“Even at USD0.76 the Governor repeated his consistent call that “an appreciating exchange rate would complicate this adjustment.” The language is likely to strengthen at USD 0.795. In his speech on July 21 the Deputy Governor noted: “a lower AUD would be helpful.”

“Certainly there seems little chance that the Bank would react to the AUD developments by lowering its underlying inflation forecast for 2018 which already sits at the bottom of the 2-3% target band. No doubt there will be considerable angst at the Bank around the growth forecast.”

“For me, rigid adherence to the assumption of an AUD holding at USD0.80 over the next 3 years with a resulting change to the confident “above trend” growth story in 2018 would be an unattractive option for the Bank.”

“Consequently, despite the sharp short term move in the AUD, I expect the RBA to retain its “above trend” growth forecast when it releases its forecasts in the Statement on Monetary Policy on August 4.”