The Reserve Bank Board decided to leave the cash rate unchanged at 1.50% at its December board meeting. That makes twenty-six consecutive meetings that rates have been on hold.

As has been the case with most Statements by the Governor in this cycle, there are very limited changes in this Statement.

Clearly, developments in global trade are tempering the Bank’s views on the global economy. In November, the Governor referred to “uncertainty from the direction of international trade policy in the United States”. In this Statement, he is much more explicit noting “there are, however, some signs of a slowdown in global trade partly stemming from ongoing trade tensions”.

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The positive growth forecasts of 3 ½ per cent (average over 2018 and 2019) are confirmed. The positive business conditions and rising levels of public infrastructure expenditure are noted. On the other hand, uncertainty around the outlook for household consumption remains an issue.

With the increase in the AUD since the last meeting (trade weighted index up 1 ½ per cent), the sentiment “the Australian dollar remains within the range that it has been in over the past two years on trade-weighted basis” persists. Although in November it was described as being in the lower part of the range.

Since the last board meeting, the Bank has released its November Statement on Monetary Policy (SoMP). In that SoMP, it includes a graph of the wage price index (WPI) and the Bank’s forecasts. A reasonable ‘eyeball’ of the graph points to the official forecast for growth in the wage price index to reach 2 ¾ per cent by end 2020. Note that at the beginning of the three previous rate hike cycles, the WPI was growing in the range of 3 ½ to 4 per cent. That forecast certainly supports the Bank’s observation that the lift in wages growth will be a gradual process. Indeed, a reasonable person might be excused for thinking that even though the rhetoric is for the next move in the cash rate to be up, the Bank expects that event to be a very long way away.

The greatest interest was always going to be in the revised assessment of conditions in the housing market. Despite recent reports of sharp falls in prices in both Sydney and Melbourne, the description of the housing market remains “conditions… have continued to ease”. A stronger description would not have been out of place.

In November, finance conditions were described as “credit conditions are tighter than they have been for some time”. The description in this Statement is “credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend”( arguably a more benign description of credit conditions).

At least the commentary is more cautious on lending growth with the term “growth in credit extended to owner-occupiers… remains robust”, being replaced by a factual assessment that the annualised pace of credit extended to owner-occupiers has eased to 5-6 per cent (that compares with a peak of 8.8% in July 2017). It is also noteworthy that new lending to owner-occupiers fell by around 10 per cent in the two months of August and September 2018.

The final paragraph in the Statement is unchanged, noting that progress towards reducing unemployment and having inflation return to target is expected to be gradual.

Conclusion

Back in early 2017, Westpac predicted that the cash rate would remain on hold through 2017 and 2018. That view was certainly not popular in markets and in consensus forecasts.

The on hold decision today finally justifies that call.

We continue to expect that the cash rate will be on hold through 2019 and 2020.

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