PREVIEW: Reserve Bank Of Australia Monetary Policy Decision Preview, Due On Tuesday 6th February 2018 At 03:30 GMT

PREVIEW: Reserve Bank Of Australia Monetary Policy Decision Preview, Due On Tuesday 6th February 2018 At 03:30 GMT

The Reserve Bank of Australia (RBA) will issue its first monetary policy decision of 2018 on Tuesday following a 2-month hiatus. Consensus looks for the central bank to keep its Cash Rate target unchanged at the record low of 1.50%, where it has stood since mid-2016, with only one of those surveyed by Reuters looking for a hike.

This is reflected in ASX 30-Day interbank cash rate futures which have fully priced in no change this time out, while the OIS curve indicates little chance of any rate adjustments until November at the earliest.

Some analysts have also begun pushing back expectations for when the RBA will start lifting rates, following a bout of softer than expected data. This includes Q4 CPI in which the headline printed at 1.9% Y/Y vs. Exp. 2.0% (Prev. 1.8%), while the RBA's preferred trimmed mean reading stood at 1.8% vs. Exp. 1.9% (Prev. 1.8%), both below the central bank's 2%-3% target range, therefore restricting scope for tighter policy.

Furthermore, the latest building approvals data showed a significant contraction in December and although the employment change surpassed estimates in the labour market report from the same month, which was accompanied by an unexpected rise in the unemployment rate.

In terms of rhetoric, there hasn't been much from the central bank since the most recent meeting.

In his final address of 2017 RBA Governor Philip Lowe noted that “the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy.”

Elsewhere, Board member Harper stated that there was a chance that the unemployment rate needs to fall below 5% before wages and inflation can respond accordingly, while he added that the current economic situation merits rates remaining supportive of the economy.

In addition, notorious RBA watcher McCrann has stated that the RBA will keep rates unchanged this week and indicated that it has no intention of changing rates, while he also pointed to stable inflation adding to the case for steady rates.

With expectations for no change focus will turn to the accompanying statement for clues of future policy as any bias in its tone could impact AUD accordingly. Participants will also be eyeing any significant jawboning of the currency given its strength against the greenback which saw AUD/USD trade above 0.8100 in late January vs. the present 0.7600 at the last rate decision.

Focus will then move to Governor Lowe’s speech on Thursday (09:00 GMT), and then onto the Bank’s quarterly Statement on Monetary Policy on Friday (00:30 GMT).

What the bank desks are saying: -

ANZ: The coming week is very much about the RBA. Not only do we have the monthly Board meeting on Tuesday, but we also get the RBA’s quarterly forecast update and policy statement on Friday, and the Governor is giving a speech on Thursday evening. All of which provides the RBA with plenty of opportunity to update its view. While the cash rate will remain on hold, we think the tone of the RBA commentary will be more upbeat after a positive run of data both domestically and globally. The higher AUD provides a bit of an offset and may see some refinement to the RBA’s commentary around the currency, but its move in trade weighted terms since November is minimal and commodity prices are stronger so we don’t think there will be that much concern about the impact of the higher AUD/USD. In terms of the RBA’s forecasts the one substantive change we are looking for is a lower unemployment forecast. We think it is likely that the Bank will reduce the 2018 year-end forecast from 51⁄2% to 51⁄4% and predict 5% by the end of the forecast period.

CBA: Australian central bankers return from holidays this week with the first Board meeting of the year on Tuesday and the next Statement on Monetary Policy (SMP) on Friday. There is also a speech by RBA Governor Lowe, at the A50 Australian Economic Forum in Sydney on Thursday. A lengthy period of masterly inactivity has characterised interest rate settings. The last rate change was in August 2016. And newish RBA Governor Lowe is the only incumbent not to have changed rates in his first year in office. This track record should remain intact after the first Board meeting for 2018. The cash rate should remain firmly fixed at the record low of 1½%. The Board discussion will no doubt include: the recent upward revision to global growth forecasts by organisations such as the IMF and the World Bank; the stimulus from the Trump tax package; the ongoing resilience of key commodity prices; the surprising strength in the AUD (or should it be surprising weakness in the USD?); the turn towards rate rises in some major central banks (which the RBA was quick to emphasise has no automatic implications for monetary settings in Australia); the tendency for recent Australian data to surprise on the upside; a labour market that has now delivered an equal-record run of continuous job’s growth (15 months); an unemployment rate not far off the 5% level that the RBA has nominated as full employment; improvements in business and consumer sentiment; the cooling housing market; upward revisions by the ABS to the level of household debt; and the absence of any real inflation pressures. Any Board member running their eye down this checklist would probably agree that the next move in interest rates is up. But they would also agree that there was no urgency to act. The Q4 CPI readings reinforced the point. The range of underlying or core measures printed below the bottom end of the RBA’s 2-3% target band (again). The average of the various measures shows that the inflation rate has undershot the target for eight quarters. An analysis of the CPI basket shows prices of some 70% of items were growing at below 2%pa. Until fairly recently, such an outcome would have the debate on rate cuts hotting up and financial markets pricing for those cuts. But the residual case for another rate cut was pretty much gone by the start of 2017. It was apparent that growth prospects were OK, deflation risks were receding and the housing market was not cooling to the extent expected. By the end of 2017 the RBA’s focus had clearly shifted towards a normalising economy. In fact, the RBA spent a fair amount of time in 2017 defining what “normal” meant for a selection of key economic indicators. Benchmarking the current economy against these normal parameters shows activity-type indicators closing in on normal. But inflation indicators still some way off. We expect the gap to close further during 2018 and as the economy normalises the case for normalising policy settings strengthens as well. One indicator to watch will be underemployment. Trends in this measure of labour market slack are important for the direction of wages and, ultimately, prices. The importance of underemployment is evident as well in its correlation with the RBA’s cash rate. The currency also matters. The RBA has been relatively vocal on AUD trends and implications in recent years. Two things stand out about the RBA rhetoric on the AUD: concerns are most prominent when the AUD has diverged from the underlying fundamentals; and concerns are typically dialled down when the AUD moves into a USD0.70-0.75 band. We suspect the RBA is “comfortable” with the Aussie in a USD0.70-0.75 range. Our forecasts have the AUD above the RBA’s comfort zone in 2018. From a policy perspective this should mean that the RBA will prefer to lag any global tightening cycle. The hope would be to take the benefit in a currency that was lower than otherwise would be the case. We expect to see the start of a modest rate rise cycle on Melbourne Cup day. The increased sensitivity of households to changing interest rates will also influence the policy process. It should mean a drawn out rate rise cycle that peaks short of the 3½% neutral rate nominated by the RBA. We put the cash rate peak for this cycle at 2½% and don’t expect to get there until early 2020.

NAB: While markets were not expecting the RBA to change its cash rate at Tuesday’s board meeting, Wednesday’s unsurprising CPI print, and the unemployment rate remaining elevated in December, has cemented that belief. What will be keenly watched is whether any other developments will change the RBA’s view on the economy and policy going forward. As such, markets will be pouring over changes in the decision statement, Governor Phil Lowe’s speech on Thursday, and the Statement of Monetary Policy (SoMP) on Friday, which include updated forecasts. The Governor’s speech will probably not be market moving given the audience and the SoMP the next day. In its last SoMP, the RBA indicated ongoing uncertainty about the degree of slack in the labour market, inflation and consumption. While recent labour market data confirms strong employment growth over 2017 (+400 jobs!), unemployment has remained stubbornly elevated, at 5.5%. This rate is above the RBA’s estimate of the NAIRIU, and is indicative of ongoing slack in the market. However, should participation rate stabilise, the unemployment rate would begin to fall, something we are looking for to occur in the coming months. The recent core inflation print of 0.4% q/q for the December quarter, brought trimmed mean inflation to 1.8%. While this number remains below the lower edge of the RBA’s target of 2-3%, the RBA’s forecasts show that the print was broadly expected by the Bank, and unlikely to significantly change the RBA’s outlook. Inflation has stabilised and is gradually trending towards the RBA’s target. As further strengthening in the labour market occurs, we expect inflation to rise to be comfortably back within the band over the medium term.

Westpac: The RBA left interest rates unchanged throughout calendar 2017, Governor Lowe noting in his final speech of the year that: "the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy". We expect the RBA to leave rates unchanged at its Feb meeting. Developments over the summer hiatus have been mixed with the Q3 national accounts disappointing but more positive news around global conditions, labour markets and confidence. Inflation remains subdued, with latest figures showing core inflation running at a 1.6% annual pace over the second half of 2017. There is also no new information around the Bank's key areas of uncertainty – the impact of lacklustre consumer demand; the extent to which weak labour income growth continues; and the risks around household debt. We expect consumer weakness to persist in 2018, leading the RBA to again leave rates on hold all year. We expect a 0.4% rise in the private sector Labour Cost Index for the December quarter. Wage growth has been running at the same quarterly pace for the last couple of years, aside from the 0.7% rise last quarter, which included the equal pay settlement for aged and disability care workers. We have no evidence to suggest there was a stirring of wage pressures in the December quarter. Indeed, the latest Westpac–McDermott Miller employment confidence survey found fewer workers reporting a rise in earnings over the last year. The Quarterly Employment Survey (QES) suggests a stronger rate of growth in hourly earnings. However, this measure is affected by changes in the composition of jobs.

Barclays: For the RBA cash rate, after a brief hiatus in January, we expect the central bank to take its cues from the inflation print and ongoing strength in the labour market, amid improving signs of consumption, to emphasise that the economic recovery remains on track

HSBC: The RBA has, so far, been patient about waiting to see clear signs that wages growth is lifting before it considers raising its cash rate. We expect this to continue for the time being. We see the RBA as unlikely to change its domestic forecasts when they are published next week. The tone of the RBA’s approach is likely to be similar to that conveyed by the Governor in a speech in November 2017 when he stated that ‘if the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down ... [but] ... the subdued outlook for inflation means that there is not a strong case for a near-term policy adjustment’. On the positive side, the RBA is expected to point to the ongoing improvement in global economic conditions, which is supporting commodity prices, Australian exports and may filter through to local business investment. On the downside, the RBA is expected to point out that the recent lift in the AUD may be somewhat unhelpful for the growth and inflation outlook, although we do not think it will tangibly affect the RBA’s central forecasts. Importantly, another factor that is likely to support the RBA’s patient approach to lift-off is that the housing market has continued show signs of cooling over recent months On the margin, this may allow the RBA to be even more patient about lifting its cash rate from its current historically low level.

RBC: This is the first board meeting for 2018 following the usual January hiatus. There are three key developments since the board last met in early December. Firstly, global activity data continue to highlight momentum, with G7 central banks continuing to shift toward the removal of policy accommodation. Secondly, domestic employment data and key business surveys have been strong although inflation remains modest. Thirdly, AUD/USD has appreciated by ~6.5% and ~3.5% on a TWI basis. On balance, these developments point to upbeat and positive communication from the RBA next week, in line with the global central bank rhetoric, although there may be some caution around the currency. We expect no substantial changes to the key macro forecasts, which should continue to assume an eventual return to above-trend growth and within target inflation. In itself, however, this is noteworthy given the constant downward revisions to overly optimistic growth forecasts. No change to GDP forecasts would be a positive development.

SocGen: Contained inflation and a relatively strong exchange rate suggest that there is little reason for the RBA to adjust the exceptionally accommodative policy stance in the near future. However, with prospects of solid growth at home and abroad – and an exceptionally strong labour market – the case for maintaining a policy rate that is negative in real terms is becoming progressively weaker. We therefore maintain the view that by the second half of next year the RBA too will begin to normalise its policy stance.

05 Feb 2018 - 15:30- ForexData- Source: RANsquawk

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