RBA “Policy Space” Lacking
(2 July 2018 - Australia) A dovish shift in Reserve Bank of Australia (RBA) Governor Philip Lowe's latest commentary and spike in funding costs to a two year high has negatively influenced market rate rise expectations.
Bank economists have further delayed the expected timing of the next Reserve Bank interest rate rise amid warnings that Australia's central bank is running out of "policy space" to deal with the next economic downturn. No change to the official cash rate is anticipated at the 3 July meeting on the first Tuesday of the month however the RBA in its June minutes removed language from the text of the statement that explicitly stated the next move was likely to be "up".
In contrast the Reserve Bank of New Zealand (RBNZ) is prepared to cut rates as much as lift them in its latest policy announcement where it kept the official cash rate on hold at 1.75 percent for yet another meeting.
“We are well positioned to manage change in either direction – up or down – as necessary,” RBNZ Governor Adrian Orr’s statement on Thursday said. "Domestically, ongoing spending and investment, by both households and government, is expected to support growth. However, the recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated. The Government’s projected spending impulse is also slightly lower and later than anticipated. "Global economic growth is expected to support demand for our products and services. Global inflationary pressure is also expected to be higher but remain modest. This outlook has been tempered slightly by trade tensions in some major economies. Ongoing volatility in some emerging market economies continues,” the RBNZ Governor said in yesterday’s statement. CPI inflation is likely to increase in the near term due to higher fuel prices. Beyond that, inflation is expected to gradually rise to our 2 percent annual target, resulting from capacity pressures.
The sentiment matches that of RBA at a time when the Australia Bureau of Statistics (ABS) is set to enhance the Consumer Price Index (CPI) with development work commencing on the feasibility of a monthly CPI. The CPI provides a general measure of change in the prices of goods and services acquired by Australian households and is a key indicator for informing monetary policy, with the RBA having an explicit inflation target to "keep consumer price inflation in the economy to 2-3 percent, on average, over the medium term". Australia is one of only two OECD economies along with New Zealand, and the only G20 country that does not produce a monthly CPI. Australia is also a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standards (SDDS), which sets guidelines for the compilation of statistics for those countries which wish to access international capital markets. The standards recommend that the CPI should be produced monthly. Australia has committed to meeting these standards however a monthly CPI is one of the few guidelines Australia does not currently meet.