RBA: Another Snoozefest

This is a big week for economic data and events in Australia. The two most important releases to watch include the RBA’s interest rate decision tomorrow and GDP growth on Wednesday. Despite rate hike hopes throughout the year, the RBA has militantly pursued a neutral monetary policy. As such, consensus continues to expect no change to the current cash rate of 1.5%. We have the same expectation, and believe that the RBA is likely to remain on hold.

With mixed data, RBA in no hurry to upset the apple cart

While the Australian dollar has been in a bearish trend since late September, recent economic data has been fairly mixed. Last week NAB Business Conditions suggested that corporations remain optimistic, however wage growth, new jobs and the employment participation rate remain weak. Earlier in November, retail sales also missed estimates. While upcoming GDP figures may be helped by corporate spending, exports and the real estate sector, the Australian consumer is clearly under pressure.

The household debt-to-income ratio has been highlighted by the RBA as a risk in the recent past, making more rate hikes fairly unlikely. Given the poor financial wellbeing of most consumers, further rate hikes could push many indebted Australians over the edge. Even a modest hike could result in substantial financial hardship, given the scale of consumer debt in the economy. According to the Bank’s estimates, household debt-to-income is currently over 175%.

Looking at inflation, official figures from the Australian Bureau of Statistics continue to suggest that inflation is decelerating. Q3 inflation came in at 1.8%, lower than 1.9% in Q2 2017. While monthly (unofficial) inflation figures have accelerated recently, this has yet to factor into the RBA’s calculations. All in all, the RBA has almost no reason to hike tomorrow. A continuation of the status quo is therefore the most likely outcome.

With RBA in hibernation, bond yields fail to excite investors