To no one’s surprise, the Reserve Bank of Australia (RBA) left its cash rate of 1.5%, marking a two-year road of unchanged interest rate. While the RBA kept an overall neutral tone, we noticed some dovishness on the inflation outlook as it downgraded 2018’s inflation target to 1.75%

Apart from some cautiousness over the slowdown in China, the central bank remained upbeat on the labour market. Meanwhile, we also noted the central bank’s concerns on the housing market due to falling housing credit.

At the end of the meeting, we noticed the RBA remain confident on hitting its 3% growth target in 2018 and 2019 but there is a limited case for us to build a rate hike any earlier than 3Q2019 due to a sharp cooling in Australia’s once red-hot housing market, added with a weak wage growth and fading “household wealth effect” that will continue to weigh on consumption. Hence, we are not expecting the RBA to lift rates until late 3Q2019 or in 4Q2019.

• To no one’s surprise, the Reserve Bank of Australia (RBA) left its cash rate of 1.5%, marking a two-year road of unchanged interest rate. While the RBA kept an overall neutral tone, we noticed some dovishness on the inflation outlook as it downgraded 2018’s inflation target to 1.75% from 2.00%–2.25% in the previous meeting. However, the RBA remained confident in its long-run inflation target and expect it to trend higher in 2019 and 2020.

• Besides, it is also noteworthy that RBA governor Philip Lowe sounded cautious as he commented that the growth in China “has slowed a little” instead of growing solidly. Since a third of its exports heads to China, we feel the country’s economy remains highly vulnerable should the global trade tensions escalate.

• On a separate note, the central bank remained upbeat on the labour market which it downwardly revised its 2-year unemployment forecast from 5.25% to 5.00%. With the wage growth having troughed and we foresee the slack in the labour market reducing, we expect price pressure to pick up albeit gradually as the high household debt will keep consumption subdued.

• Meanwhile, we continue to note a cautious statement from Lowe on the housing market as housing credit has declined by 5.5% on an annual rate. Given the weaker demand from the investors, added with tighter lending standards, we foresee further weakening in the housing market underpinned by weaker wage growth and high household debt.

• At the end of the meeting, we noticed the RBA remain confident on hitting its 3% growth target in 2018 and 2019 but there is a limited case for us to build a rate hike any earlier than 3Q2019 due to a sharp cooling in Australia’s once redhot housing market, added with a weak wage growth and fading “household wealth effect” that will continue to weigh on consumption. Hence, we are not expecting the RBA to lift rates until late 3Q2019 or in 4Q2019.

Source: AmInvest Research - 8 Aug 2018