The Reserve Bank is not as dovish as some think

The RBA would have been more dovish if it was simply waiting for inflation data to confirm another cut.

A man is reflected on a wall underneath the Reserve Bank of Australia. Picture: AFP.

Looking at the fall in the Australian dollar after the RBA statement on Tuesday, a casual observer could be forgiven for thinking the outlook was a bit dovish, therefore providing more chance of rate cuts that would hurt the local currency. But the central bank certainly didn’t signal a November cut.

While the Australian dollar slipped from US76.74c to US76.50c, the US dollar rose against most currencies. Meanwhile, the British pound tumbled to a three-decade low versus the greenback amid investor concern about Britain’s exit from the European Union after Prime Minister Theresa May’s announcement that she would begin the process of leaving the bloc in the first quarter of 2017.

Some commentators have been expecting the new RBA Governor Philip Lowe to be more of a hawk because he has apparently placed more weight on financial stability concerns than his predecessor Glenn Stevens, but the wording of the statement yesterday cannot be seen as more dovish. Certainly the RBA wasn’t as dovish as it would have been if the RBA was merely waiting for the next set of inflation figures to confirm a view that it needed to cut again.

After cutting rates in August and with inflation data just three weeks away, the RBA was never going to cut rates in October barring a crisis.

But if it had any doubt that the two rate cuts since core inflation slumped below target in the March quarter wouldn’t be enough to bring it back over time, or that September-quarter data could deteriorate further, the RBA wouldn’t have kept the neutral policy bias it adopted at the September meeting.

On the contrary, it would have said something like “over the period ahead further information should allow the board to refine its assessment of the outlook for growth’. That’s the language it introduced at the July meeting which preceded the August rate cut.

Indeed, while the statement was quite mixed, the final analysis should be that it was neutral and that only shockingly-low CPI data, further delays in US rate hikes or offshore shocks will trigger another rate cut from here. The key appears to be in the second-last paragraph.

The RBA said: “The rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently”. Last month it said: “The best available information suggests that dwelling prices overall have risen moderately over the past year and growth in lending for housing purposes has slowed.”

When it cut in August, the RBA cited five points it claimed had diminished the likelihood of lower interest rates exacerbating risks in the housing market. While it didn’t cite them on Tuesday as reasons to cut, the RBA mostly repeated those points, with the addition of a dovish concession (rents are the slowest in years) and the addition of a hawkish concession (some markets have strengthened recently).

Of the two, the acknowledgment that house prices could be picking up again in response to rate cuts is probably more important for the policy outlook, though the comment on rents could be highlighting unsustainability of housing bubbles in Sydney and Melbourne.

The rest of the RBA’s statement released was basically the same, except for the extended discussion on employment which is “somewhat mixed” and “subdued” as far as full-time jobs are concerned. The key addition in that paragraph was that “forward-looking indicators point to continued expansion in employment in the near term” — another reason to stay on hold.