Reserve Bank of Australia: Glass Half Full

There was a general consensus amongst analysts that the statement published by the Reserve Bank of Australia (RBA) after their February rate meeting reflected a more upbeat assessment of the economy than has been the case on previous occassions.

The Australian Dollar popped 25 to 30 basis points higher against the USD after the news confirming the more positive tone of the statement.

An upgrade in the RBA’s assessment of global growth due to the trend towards reflationary economics was a major factor contributing to the brighter outlook.

"The outlook continues to be supported by the low level of interest rates. Financial institutions remain in a position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment," read the statement.

Furthermore, the RBA is confident on the outlook for Australian employment going forward observing growth in full-time employment turned positive late in 2016.

The Bank stressed the forward-looking indicators point to continued expansion in employment over the period ahead.

“The tone of its media statement struck a more optimistic note compared with its previous statement in December.  Indeed, the RBA viewed even weaker parts of the economy as a glass half full,” says St George Bank’s Chief Economist Besa Deda.

However, several analysts thought the RBA was being a bit too optimistic with its growth forecast of 3% over the next couple of years as there as a risk of actual growth undershooting, and then the possible need for a rate cut.

The vast majority of commentators do however believe the Bank will keep rates on hold at 1.5% for the rest of 2017.

However, RBC Capital Market’s Elsa Lignos noted the continued subdued inflationary outlook and the RBA’s saying the return to 2.0% would be “a bit more gradual,” revealed a risk of a rate cut.

“The RBA’s tolerance for downside surprises in either activity or price data will likely be limited,” says Lignos.

She also noted downside risks from housing further opening the way for a rate cut.

“Moreover, should the housing market, and investor credit growth, in particular, show signs of slowing, financial stability risks associated with lower borrowing costs would also recede somewhat.”

Morgan Stanley took a pessimistic line in contrast to the RBA, saying that the continued deleveraging of the resource sector and an “austerity-focused government,” would weigh on growth and possibly lead to a rate cut in Q4.

Regarding the outlook for the Australian Dollar, ultimately the event is neutral.

The most likely source of upside for the Aussie would come from overseas “probably from policies adopted by the new US Government," argue strategists at CommSec. "For instance, stimulatory policies could serve to lift the US, and the broader global economy, in turn boosting inflation. In that event, rate hikes would be more likely in Australia than rate cuts."

Westpac meanwhile argue the AUD is undervalued and therefore due a rebound.

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