RBA unlikely to deliver any major shifts in policy - Westpac

Matthew Hassan, Senior Economist at Westpac, notes that the RBA July policy meeting, due on July 4th, is unlikely to deliver any major changes in ts current policy stance.

Key Quotes

The July policy meeting is unlikely to deliver any major shifts in policy or rhetoric. August offers a better window for potential changes with the Bank getting another read on inflation and presenting updated forecasts in its August Statement on Monetary Policy. But even by August there will be little new information on labour market slack (reliable underemployment estimates are only updated quarterly) and wages growth, and the impact of macro-prudential measures on housing markets will still only be tentative.

Beyond August, we expect the RBA's views on growth prospects to become less constructive. Westpac continues to expect growth of around 2½% in 2018, well below the RBA’s current 3¼% forecast. By year end, key parts of our view will become more apparent – disappointing global growth outcomes, a continued slide in commodity prices and a downturn in dwelling construction in particular.

A downgraded 2018 growth view and the prospect of a more protracted period of labour market slack and inflation weakness will clearly test the resolve of the RBA's 'firmly on hold' stance. However, we expect it will still be insufficient to prompt the Bank into additional policy easing. Given its concerns about potential financial stability risks, and the experience from 2016 – when rate cuts quickly reignited housing markets – it will be reluctant to move rates any lower.

On its own, a growth outlook marginally below trend is not likely to be enough. The Bank would have to be convinced that a further cut in rates would deliver a significant enough boost without leading to unacceptable financial stability risks down the line.

Another material undershoot on inflation could prompt more of a rethink, but this also looks unlikely – Westpac expects core inflation and wages growth to lift from here, albeit only slowly.

The bottom line is that building a case for official interest rates to move either way will be difficult. Hence we continue to see no reason to change our long held view that the official cash rate will remain on hold throughout 2017 and 2018