RBA left the cash rate unchanged at 1.5% in September. The accompanying statement contained few changes from the previous one. This perhaps explains the modest drop in Aussie after the release, as the market had expected a more hawkish message. The central bank is upbeat over the economic developments, hinging on the improving non-mining investment. Policymakers also acknowledged the strength in the job market, pointing to the rise in participation rate as well as a number of forward-looking indicators. Comments on the exchange rate were limited, with the central bank reiterating the impact of a strong Aussie on inflation, GDP growth and employment. We expect the central bank to keep the policy rate unchanged until 2H18.

Policymakers retained the view that domestic economy would ‘gradually pick up over the coming year’. The members acknowledged that ‘non-mining business investment is picking up’. They did not mention the decline in mining investments this month, signaling the negative impact of which has almost dissipated. On the job marker, the RBA noted that it has ‘continued to grow strongly over recent months’. It took note that rise in labour force participation as an indication of rising confidence in the employment situation. However, persistently low wage growth should continue for some time.

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The central bank did not comment on the decline in AUDUSD (-2.3%) since the last meeting. It only attributed its appreciation since mid-year partly to a lower US dollar It warned that the higher exchange rate would prolong ‘subdued’ inflation, and weigh down on the outlook for output and employment.

Other than the mild drop in Australian dollar, market reaction of the announcement was muted. IB futures-implied RBA has priced in a 64% chance of a 25bp hike by May, and 100% by August 2018. These bets were similar to those before the announcement. We expect the central bank to keep the policy rate unchanged until 2H18.


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