• Changes to the Governor’s Statement were minimal with the issues around growth developments and the housing market still in flux.
  • As expected, the Reserve Bank Board decided to leave the Cash Rate unchanged at 1.50%.
  • There were minimal changes in the wording from the Statement following the February Board meeting.

In fact, at least in the February Board meeting, it was recognised that “some downside risks have increased” for the domestic economy. In this Statement, that downside risk is not mentioned. The Governor does point out that “other indicators suggest growth in the Australian economy slowed over the second half of 2018”. Of course, the extent of this slowing will be revealed in the GDP report which prints at 11:30 am tomorrow. Westpac expects that the six month annualised growth pace in the economy will slow from 4 per cent in 2018 H1 to 1 per cent in 2018 H2. This spectacular slowing, even if at 1.5% in H2, is surely worthy of stronger language than seen in this Statement. It is also no surprise that the Board still forecasts growth around 3 per cent this year. Any change will only be made following the May Board meeting.

There has been considerable uncertainty as to whether the Bank assesses falling house prices as a threat to household consumption. Some official comments deny the existence of significant wealth effects. Today’s Statement seems to confirm that there is a concern of a wealth effect, “the main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling house prices in some cities”. That seems to indicate recognition of a wealth effect.

Commentary around the housing market is, surprisingly, slightly more constructive. In February, the markets were described as “weakened further”, whereas today’s Statement notes “conditions remain soft”. The data would indicate further deterioration.

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The labour market continues to be described as “strong”, and the unemployment rate forecast of 4 ¾ per cent over the next couple of years is confirmed. Westpac expects that given a much softer growth environment, there will be a modest increase in the unemployment rate through 2019.

Conclusion

We are not surprised that the Governor chose not to repeat his commentary in a recent speech that prospects for interest rates are now evenly balanced. This commentary and the ‘rate hike’ commentary has never appeared in the Governor’s Statement and was limited to Board minutes; Statement on Monetary Policy; and some speeches.

We have to recognise that the Statement today is slightly more upbeat than we saw in February. As we later found out, the Board decided in February to restate the risks around interest rates to be more symmetric than had been the consistent practice through 2018. Perhaps, that significant change required strong language, whereas today, despite no real encouragement from the data, it was considered more appropriate to be circumspect.

Nevertheless the changes are very small and the real issues around growth developments and the housing market are yet to unfold.

Westpac confirms its view that the RBA Board will decide to cut rates by 25bps in both August and November 2019.

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