RBA holds its cash rate steady – Westpac

Bill Evans, an analyst at Westpac, notes that the Reserve Bank of Australia (RBA) has held the cash rate steady and the commentary was a little more optimistic but Westpac retains their call for the next cut in February.

• “The key themes around the policy outlook which have been consistently promoted in these RBA statements in recent months have been repeated today.
• Firstly, the Board “continues to monitor developments, including in the labour market”, and secondly, “the Board is prepared to ease monetary policy further if needed”.
• However, an additional theme appears in today’s Decision Statement, “long and variable lags in the transmission of monetary policy”. This is not a new observation, given that it has appeared in Board minutes in the past but being elevated to the more succinct Decision Statement gives it some enhanced prominence.
• Finally, in reference to the turnaround in established housing markets, the Decision Statement still notes that “new dwelling activity is still declining and growth in housing credit remains low”.
• This Decision Statement is a little more positive than we have seen in the past, mainly through the linking of rising house prices to a potential lift in spending and residential construction. It also continues to emphasize that the Board is prepared to be patient, is monitoring developments, that policy has long and variable lags, and is prepared to ease  "if necessary”.
• If we were expecting a policy move over the next month, then this Decision Statement would raise some questions. However, our forecast that there will be a cut at the February meeting looks much safer. Over the course of the next few months, there will be a clear test of the RBA’s view that the unemployment rate will hold steady. There will also be further evidence around the strength of the consumer with the national accounts to be released tomorrow as well as two more retail sales reports.
• The response of the Australian dollar to any confidence that the RBA will be on hold in February will also be important. We assess that one of the factors behind the consistently low AUD is the expectation that the RBA will continue down its easing path.
• Overall, despite this emphasis on “monitoring” and the slightly more upbeat discussion on the Australian economy, we still feel confident that the rate cut in February will be delivered.”