RBA To Pause For The Rest Of The Year

The RBA will likely be on hold at the September meeting. Indeed, the central bank is now expected to leave interest rates unchanged longer than previously expected. Some market participants even bet a rate cut later in the year after the governor's testimony to the House of Representatives Standing Committee on Economics. The latest Credit Suisse swap index shows the market has priced in -114 bps rate cut by the RBA over a year. We have not yet changed our monetary forecast from tightening to easing. However, we do expect the central bank will not raise interest rate anymore at for the rest of the year.

In the opening statement to House of Representatives last week, there were significant changes in the central bank's stance on economic and inflation outlook. Governor Glenn Stevens noted that a 'decline in confidence' arising from the recent events internationally may 'well dampen demand somewhat compared with the outlook set out in early August. The governor appeared more relaxed regarding the inflation outlook. While 'significant rises in a range of administered prices are still set to occur over this period and unit costs have been rising quite quickly given the fairly poor performance of multi-factor productivity growth over recent years', Dampening in demand and structural economic changes may 'act to lessen the upward trend in inflation pressures that appeared to be in prospect'. The RBA reiterated that the price pressure after the flood is a temporary shock and the central bank will look through the issue in considering monetary policy.

The employment report was probably the most important indicator released since the August RBA meeting. The jobless rate rose to 5.1% in July after staying at 4.9% over the past 4 months. The total number of payrolls increased +3K to 11.48K during month as driven by a addition in part-time employment. However, the decline in full-time jobs has made the situation worrisome. Confidence in Australia continued to deteriorate. The WMI consumer sentiment index slumped to 89.6 in August from 92.8 in the prior month. The NAB business confidence index edged higher to 2 in July from 0 in June but remained at the lowest level in 6 months. The business conditions index dipped to -1 from 2. Weakness in business confidence is expected to affect hiring intention in coming months.

Concerning monetary policy, Stevens pointed out at the testimony that current financial conditions, in particular elevated Australian dollar, have exerted 'a fair degree of restraint' on the central bank's moves. He unveiled that policymakers believed 'the most prudent course was to sit still through this period'. We view this as a neutral stance and expect the same tone will be delivered at the September meeting.