RBA minutes of December 2017 see "significant" risks for consumer - Westpac

Matthew Hassan, Research Analyst at Westpac, explains that the RBA minutes of December meet has confirmed confidence around labour market but see "significant" risks for consumer.

Key Quotes

“The most substantive change is an additional line given prominence in the concluding paragraph stating that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” The clear message is that the Bank will not pre-empt things – it is prepared to wait for an improvement in actual conditions to come through before contemplating any changes.”

“Elsewhere in the statement, the Bank indicates its forecasts are unchanged with growth “to average a bit above 3 per cent” and CPI inflation “to be a bit above 2 per cent in 2018”. Note that the Bank’s current forecasts, from the November Statement on Monetary, have real GDP growth lifting to 3¼% in 2018 and headline CPI inflation lifting to 2¼% (but underlying inflation holding at 1¾%). The Bank will release updated forecasts with the February Statement on Monetary Policy on Friday.”

“As expected, the Governor’s statement acknowledged the more positive tone from abroad and from some of the domestic data. The global backdrop is now described as a “broad-based pick-up”. China’s growth is described as solid with what seems to be a more positive take on risks (“authorities paying increased attention to the risks in the financial sector and the sustainability of growth”). Global inflation remains low but is now viewed as likely to “increase over the next couple of years”.”

“On the domestic economy, comments are more mixed with data over the summer viewed as consistent with the Bank’s forecast for growth to pick up but household consumption a “continuing source of uncertainty” given weak growth in household incomes and high debt levels. Commentary around the labour market is largely unchanged from December – strong job gains in 2017 and indicators pointing to solid growth ahead but wages growth low and likely to stay low for a while yet. A new comment that the Bank expects “a further gradual reduction in the unemployment rate” is consistent with its November forecasts but again places the emphasis on shifts being slow to come through.”

“This slowness is also emphasised in an additional comment on inflation, which is seen as “likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing”.”

“Wording on the Australian dollar was unchanged except for a slight qualifier that the view “it remains within the range that it has been in over the past two years” is on a trade-weighted basis. With the AUD/USD cross retracing sharply in recent sessions (currently back to 0.786 USD from well over 0.800 USD) the need to bolster their rhetoric has faded.”

“Lastly, the Bank again notes that “housing prices are little changed over the past six months” but adds that prices have “recorded falls in some areas” – a slight contrast to the December statement which instead noted “conditions have eased in Sydney” and gave a little less prominence to the observation.”

“Conclusion

• Overall, the February decision and Governor’s statement contained few surprises. The Bank continues to expect a lift in growth and inflation over coming years and, with the improvement expected to be gradual, is signalling that it is prepared to be patient in assessing how conditions are evolving.
• The RBA’s ‘patient approach’ ensures policy will remain on hold over the first half of 2018. Westpac continues to see a more challenging year ahead for the Australian consumer and another sub-par year for wider economic growth. As such we continue to expect rates to stay on hold through the remainder of 2018 and in 2019.”