RBA on hold: signal data dependent approach

The Reserve Bank of Australia (RBA) Board held the cash rate steady as expected at 1.50% today, though the Governor's statement (see here) provided a few highlights. The key point of interest was a change in the wording to the final sentence of the statement, which markets look to as a gauge of the outlook of the Board.

In March, the guidance was that "... the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time", whereas today the Governor noted "The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time." 

There are two reasons why this is notable to markets; firstly, the previous guidance had been used by the Governor in every monthly decision statement ever since April 2017, and secondly, it indicated the Board is prepared to take a flexible approach to policy settings if warranted by the data. Market pricing has shifted aggressively over recent weeks, with a 25 basis point (0.25%) cut expected by August and a further 15 basis points of easing priced in by year-end. 

Today's statement continued the recent theme in RBA communication in highlighting what it has referred to as 'tension' in the data -- essentially mixed signals between economic activity and strength in labour market data -- by noting "the GDP data paint a softer picture of the economy than do the labour market data".

After Q4's GDP data confirmed a sharp slowing in activity over the second half of 2018, the Board acknowledges that household consumption has been reined in due to a "protracted period of weakness in real household disposable income and the adjustment in housing markets". In mitigation, assessment of the labour market is described as "strong" going on to highlight that "there has been a significant increase in employment and the unemployment rate is at 4.9 per cent". How this nexus evolves is critical given the Board's data dependent approach. For now, the statement highlighted high job vacancies and skills shortages in certain areas as positives to the employment outlook.

Also worth noting is that the Board's assessment of the global economic conditions has softened by acknowledging that "growth has slowed" and continuing to point out that downside risks have increased, specifically mentioning declining global trade and softening intentions for investment. As recently as March, the Governor highlighted that a slowing global economy presented risks to the domestic outlook, which is underpinned by public infrastructure investment, private sector investment and labour market conditions.