RBA will look at unconventional options if downside risks materialise - ANZ

Kieran Davies, research analyst at ANZ, highlights the key details of today’s released August RBA statement on monetary policy.

Key Quotes

“Persistently low inflation points to an easing bias. As expected, the RBA’s forecast profile for underlying inflation was unchanged, showing inflation at or below the bottom of the 2-3% target band for the entire forecast period. Importantly, in our opinion, the RBA’s initial forecast for Q4 2018 showed average inflation remaining at the bottom of the target band rather than returning to the 2.5% midpoint. We think this is a dovish signal, given that the RBA cut rates this week and the forecasts are based on market pricing, which was for another rate cut.

Near-term growth was revised higher, but the RBA is more uncertain about the outlook. The RBA revised near-term growth higher given Q1 GDP was significantly higher than it had expected, but left the rest of its forecast profile for modest growth unchanged. Unemployment was expected to “move only a little lower”, with a degree of spare capacity in the labour market for some time. The statement highlighted the uncertainty about the outlook, citing China, the labour market, the housing market, and the exchange rate.

We think the RBA would be looking more closely at unconventional options if downside risks to the economy materialise. We think the RBA would have to look more closely at unconventional policies if, say, the economy takes a turn for the worse, the exchange rate unexpectedly strengthened, and/or low inflation expectations kept actual inflation below the target band. The RBA thought the likelihood of using such options was “very remote”, but we are much less sure given the cash rate is close to the RBA’s 1% floor.

Governor Stevens may talk about the limits to monetary policy next week. The Governor is speaking on 10 August at what might be his last speaking engagement before his term finishes on 17 September. We think he may cover familiar ground, emphasising that central banks are having to shoulder too much of the burden of supporting growth and argue that there are limits to what can be achieved with monetary policy. He may also repeat his support for the RBA’s inflation targeting framework and argue that tougher regulations have put the banks in a better place.”