RBA on hold in November

The Reserve Bank of Australia Board left the cash rate on hold at 0.75% on Tuesday, as expected. Leading into this meeting, market pricing had been lowered to indicate only around a 5% chance of a November rate cut, while all 25 economists surveyed by Bloomberg Australia had forecast no change in policy settings. 

Developments from offshore have been in key in the Board's recent thinking and this was the early focus of the decision statement from Governor Philip Lowe. Risks to the global economic outlook are still described as "tilted to the downside", though it was acknowledged that since the Board last met "expectations of further monetary easing have generally been scaled back" and also that "financial market sentiment has improved a little". Though not stated, the key developments here have been an easing in geopolitical risks with more optimism coming over the US-China trade situation and diminished risk of a no-deal Brexit, while fears of a US recession have also calmed somewhat.

Domestically, ahead of Friday's quarterly statement and updated forecasts, the governor outlined that GDP growth in 2019 is now seen at 2.25% compared to the 2.5% pace anticipated 3 months ago, though it appears that it will retain its forecast for growth of 2.75% in 2020 given that output is still expected to expand by 3.0% in 2021. The factors mentioned as supporting this assessment were stimulus from interest rate cuts, tax relief, infrastructure investment, rising house prices, and a more buoyant resources sector. Key risks identified are around the outlook for household consumption growth as well as the housing construction cycle, which is yet to reach its trough, and drought-related impacts.

The key to the Board's reaction function presently is around developments in the labour market. Overall, it continues to view an economy that is operating with spare capacity, with the underlying dynamic being that strong employment growth is being met with rising participation. As such, the unemployment rate is expected to remain around its present level of 5.25% "for some time, before gradually declining to a little below 5 per cent in 2021". The governor also noted that faster wages growth "is needed for inflation to be sustainably within the 2-3 per cent target range". On inflation, the outlook is little changed, though the forecast for 2020 has risen from 1.75% to 2.0%, but is maintained at 2.0% for 2021. 

In his concluding remarks, the governor maintained his recent practice of describing monetary policy in terms of its impact on employment and incomes. Governor Lowe's assessment was that "the easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target". With only one meeting left in 2019, it appears unlikely there will be enough evidence accumulate over the next few weeks to shift that view. All considered, the Board appears in no rush to ease again in 2019 but it still retains its easing bias, which it is prepared to act on if its labour market outlook is deemed at risk.