RBA: Down-playing the neutral rate discussion - AmpGFX

In view of Greg Gibbs, Analyst at Amplifying Global FX Capital, a modest increase in rates by RBA would still leave them accommodative and support further recovery in the labour market.

Key Quotes

“One argument for raising rates is that they are so low they are generating financial stability risks.  The RBA’s own research presented to the public via its 4 July policy meeting minutes, released on 18 July, was that the neutral rate is around 3.5%, 200bp above the current policy setting.  As such, a modest increase in rates would still leave them accommodative and support further recovery in the labour market.”

“However, Governor Lowe has not ventured into any such thinking.  Instead, he took the same tack as Deputy Governor Debelle in a speech the week earlier, on 21 July, suggesting that the inclusion of this discussion in the policy minutes had little relevance to current policy debate and was just one of a regular series of topics for discussion presented to the policy board.”

“He said that there “had been a lot of media discussion about it, and a lot of it misinterpreted our intentions.”  He said commentators “got overly excited by its inclusion in the minutes.”

“Lowe’s comments suggest that the neutral rate discussion was not planted in the minutes to warn the market that the RBA is thinking about raising rates any time soon. However, they still suggest that the RBA thinks its current policy settings are very accommodative, and should be considering hiking rates well before it reaches its policy targets.”

“Nevertheless, the RBA Governor Lowe left this discussion for another day, suggesting that he is quite comfortable with the current policy settings.  The RBA might argue that there is still plenty of time to raise rates with inflation forecast to remain below the mid-point of its target for quite some time.  In the May Statement on Monetary Policy, the RBA forecast inflation returning to target around mid-2019.”