For the first time since he was appointed in September 2016 the RBA Governor changed the last sentence in his Statement. The revised sentence gives greater emphasis to the current fluidity of the policy environment rather than signalling a long period of no change.

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.

However, our research shows that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016. Also note that the key concluding sentence, which has been used in every Statement since October 2016 has been “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”. The clear implication behind that statement is an expectation that policy was likely to be on hold for a considerable period. As we have seen, that was an accurate assessment.

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In the April Statement, he has changed this language for the first time ever. He still notes that “the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting”. However, he then changes tact with a new sentence. “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”. Although, a cursory glance at this sentence might not indicate any change in stance, it does give greater emphasis to the fluidity of the current situation. If this change was not intended, then clearly he would have continued with the approach that has marked his time as Governor.

Therefore this change appears to be a very clear intention to signal that policy is much more ‘live’ than has been the case since the Governor was appointed.

This signal is consistent with Westpac’s expectation that the Board is likely to adopt an easing bias following the May Board meeting. Our thinking behind that approach has been that the Statement on Monetary Policy for May will include a downward revision of the Bank’s growth forecasts. Further support for this view is apparent in the exclusion of the RBA’s current growth forecasts in the April Governor’s Statement. Arguably , this indicates an uneasiness with the 3 per cent for 2019 and the 2 ¾ per cent for 2020.

In the RBA’s defence, note that the March Governor’s Statement came before the release of the December quarter National Accounts, which showed that six month annualised growth had slowed to 1 per cent in the second half of 2018. We expect that the RBA will lower its 2019 growth forecast from 3 per cent to 2 ¾ per cent, and the 2020 forecast from 2 ¾ per cent to 2 ½ per cent. Those forecasts are either at or below ‘potential growth’ (assessed as 2 ¾ per cent).

In commenting on the low growth rate for 2018 of 2.3%, the Governor pointed out “the GDP data paint a softer picture of the economy than do the labour market data”. Arguably, the RBA may hold off from a specific easing bias( despite forecasting below trend growth), attributing this tension in the data as key to the outlook for policy.

Westpac has argued that the actual rate cut will not occur until August, when a further downward revision of forecast growth will be required and evidence will be building of a slowdown in the labour market.

Last week, we wrote on the potential impact of tonight’s Federal Budget on monetary policy. If the Governor saw the Budget as a significant swing factor in his thinking, it is unlikely that he would have chosen to change the language in the Statement just before the announcement.

It is our view that a boost to disposable income from tax cuts will certainly be of some assistance to the economy, but is unlikely to sufficiently offset the near term drag on incomes and spending from the negative wealth effect from falling house prices; weak wages growth; and a major downturn in activity in the housing market.

Conclusion

We were a little surprised with the Governor’s change in stance but find it consistent with our general view that the RBA is on track to adopt an easing bias in May and cut the overnight cash rate in August and November.

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