AUD Reverses Sharply As RBA Disappoints Bulls

Key Notes from The Statement

As was widely expected, the RBA kept rates on hold at their July meeting. The tone of the meeting remained roughly neutral with a policy outlook identical to that of June, with the bank concluding that “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.

The bank also reaffirmed its constructive view on the global environment repeating that “the broad-based pickup in the global economy is continuing” and “labor markets have tightened further”. However, the bank did note that inflation had “declined recently in response to lower oil prices” and that “wage growth remained subdued in most countries”.

Growth Still Expected to Pickup

On the domestic front the bank downplayed Q1 GDP saying, “as expected, GDP growth slowed in the March quarter, partly reflecting temporary factors”. However, the bank did note that the “economy is expected to strengthen gradually”, but abandoned the specific reference to 3%, used previously. This slight change suggests that the RBA could downgrade their growth outlook at the August SOMP after the May SOMP forecast GDP to rise at its fastest level since before the global financial crisis.

On currency strength, the RBA again stuck to the view that “an appreciating exchange would complicate “the economy’s adjustment. Referring to domestic inflation again the bank’s view was unchanged from June saying that “inflation is expected to increase gradually as the economy strengthens”.

Labour Market Remains Mixed

Referring to the labor market the bank noted that conditions “remain mixed” as “employment has been stronger over recent month” but” wage growth remains low” and “is likely to continue for a while yet”. This is reflected by the recent record low Q1 wage growth data which showed earnings dropped to flat year over year. As with last time, the RBA tied low wages in with spending, but also referred to the impact of debt this time, saying that “consumption growth remains subdued reflecting slow growth in real wages and high levels of household debt”.