RBA leaves rates at 2%, but retains an easing bias
- The decision by the RBA to leave interest rates on hold at 2% provided no surprises. The post meeting statement was in fact little changed from the November statement. Quite clearly the RBA remains comfortable with current interest rate settings and repeated that “prospects for an improvement in economic conditions had firmed a little over recent months.”
- The RBA continues to refer to a gradual improvement in non-mining sector conditions, stronger growth in employment and a steady unemployment rate (presumably on a trend basis).
- That said the RBA repeated that “the outlook for inflation may afford scope for further easing, should that be appropriate.” In other words it retains and easing bias.
Implications
- We are now at least half way through the unwinding of mining investment and despite this and a crash in commodity prices – the iron ore price is down nearly 80% from its 2011 high – the Australian economy has not plunged into the recession that many said was inevitable. This is in large part due to the fall in interest rates and the $A over the last four years that have enabled previously suppressed parts of the economy (like NSW and Victoria) to bounce back. In other words the economy has nicely rebalanced.
Going forward our assessment remains that the economy will continue to rebalance and avoid recession. However, several considerations suggest that the economy will still need a bit more help in order to return to potential growth on a sustained basis, which is around 2.75% pa. In particular: the boost to growth from housing construction will likely peak next year with approvals trending sideways; wealth effects from rising home price prices are now fading; and the outlook for non-mining investment remains soft.