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23 Mar 2016
RBA on hold - ANZ
Felicity Emmett, Head of Australian Economics at ANZ, now expects the RBA to keep the cash rate on hold at 2.0% this year and next.
Key Quotes
• “With the economy on a slightly firmer footing and the risks around the global outlook dissipating, we now think further monetary policy easing is less likely and that the Reserve Bank is more likely to keep the cash rate unchanged at 2%.
• Our call for cuts made in September last year was based on a deteriorating global backdrop as well as fading stimulus from the housing sector and the lower AUD. It also predated the surprising strength in the labour market data late last year. In September last year our view was that further inroads into the unemployment rate would be difficult and we saw greater risk that unemployment worsened.
• But while the global outlook remains challenged and the resilience of the AUD suggests it won’t provide as much stimulus this year, business surveys suggest that the recovery in non-mining activity is gaining traction. Moreover, the labour market is coming off a much better base, with the unemployment rate now down to 5.8%.
• On the global front, market volatility rose sharply early in the year, but has now dissipated. Central banks remain concerned about the lack of inflation with the US Federal Reserve on a more modest tightening path and many other central banks – including the ECB, BoJ, and PBoC – still in easing mode. But commodity prices look to have broadly bottomed, suggesting that the risks around global demand are less tilted to the downside.
• This is not to say that we are out of the woods. The domestic recovery is likely to continue to be a slow grind. While the strength in business conditions is encouraging, retail sales have softened, housing activity – while still solid – is unlikely to be a significant contributor to growth this year, and the outlook for nonmining investment remains disappointing. Further inroads into the unemployment rate are likely to be hard won.
• As such, we continue to see the risks tilted towards further monetary policy easing. With inflation likely to remain low and unemployment relatively elevated, another disappointment on growth or shock from offshore could well see the Bank convert that bias to rate cuts.”
Key Quotes
• “With the economy on a slightly firmer footing and the risks around the global outlook dissipating, we now think further monetary policy easing is less likely and that the Reserve Bank is more likely to keep the cash rate unchanged at 2%.
• Our call for cuts made in September last year was based on a deteriorating global backdrop as well as fading stimulus from the housing sector and the lower AUD. It also predated the surprising strength in the labour market data late last year. In September last year our view was that further inroads into the unemployment rate would be difficult and we saw greater risk that unemployment worsened.
• But while the global outlook remains challenged and the resilience of the AUD suggests it won’t provide as much stimulus this year, business surveys suggest that the recovery in non-mining activity is gaining traction. Moreover, the labour market is coming off a much better base, with the unemployment rate now down to 5.8%.
• On the global front, market volatility rose sharply early in the year, but has now dissipated. Central banks remain concerned about the lack of inflation with the US Federal Reserve on a more modest tightening path and many other central banks – including the ECB, BoJ, and PBoC – still in easing mode. But commodity prices look to have broadly bottomed, suggesting that the risks around global demand are less tilted to the downside.
• This is not to say that we are out of the woods. The domestic recovery is likely to continue to be a slow grind. While the strength in business conditions is encouraging, retail sales have softened, housing activity – while still solid – is unlikely to be a significant contributor to growth this year, and the outlook for nonmining investment remains disappointing. Further inroads into the unemployment rate are likely to be hard won.
• As such, we continue to see the risks tilted towards further monetary policy easing. With inflation likely to remain low and unemployment relatively elevated, another disappointment on growth or shock from offshore could well see the Bank convert that bias to rate cuts.”