Chief economist update: RBA not risking market disappointment

As widely expected, the Reserve Bank of Australia (RBA) kept the official cash rate unchanged at 1.0% at its September meeting.

Operative phrase: "as widely expected".

You, I and Irene can wax pedantic about some changes in RBA governor Philip Lowe's September statement and that of the previous month, but at the end of the day 'twas same old, same old.

So as not to reinvent the wheel, here's Factset's summation:

  • Continues to assess global economy as reasonable, with risks tilted to the downside. Language around trade and technology disputes modified slightly to note impact on international trade flows, in addition to the impact on business investment.
  • Repeats that domestic growth has been lower-than-expected in H1 and that looking ahead, growth is expected to strengthen gradually. Notes support from low rates, income tax cuts, infrastructure spending, housing market stabilization and the outlook for resources.
  • Continues to see support for household income coming from stabilizing house prices. No longer describes housing conditions as soft, instead highlighting further signs of a turnaround in Sydney and Melbourne.
Concluding that: "It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time."

But back to the point. A surprise RBA rate cut would unnerve financial markets and spark speculations that the Australian central bank is more concerned about the domestic economy than it is letting on.

To be sure, the property market appears to have "stabilised" - the CoreLogic Home Property Values Index looks to have bottomed: Australia (-5.9% in August from -7.3% in July); Sydney (-6.9% from -9.0%); Melbourne (-6.2% from -8.2%); Brisbane (-2.1% from -2.4%); Perth (-8.8% from -8.9%); Hobart (up 3.1% from up 2.8%); Canberra (up 1.2% from up 1.1%).

Here's to hoping to "see support for household income" that, in turn, encourages consumers to spend and lift the domestic economy. However, latest data show that retail sales remain weak - 2.4% in the year to July from this year's high of 3.5% in March and over 8% before the GFC.

The income tax cuts delivered on 1 July should help, but not when wages remain stagnant (unchanged at 2.3% in the year to the June 2019 quarter from March) and the unemployment rate still below the RBA's new NAIRU (non-accelerating inflation rate of unemployment) of 4.5% -- the unemployment rate's currently at 5.2% --  ensuring "inflation pressures" will "remain subdued... for some time yet".

Then again, the weaker A$ and the lagged stimulative effects of the RBA's back-to-back rate cuts in June and July could surprise us, Australians all, on the upside.

Link to something HwnlVNEm