The March RBA meeting has the feel of a ‘dead rubber’, with only 3.5bps of easing priced (a 14% chance) and a sense that there needs to be a big shift in either direction for the RBA to move from their easing bias to something else.
There have been some developments that may boost their demand forecast – the decent Q4’12 capex report and the weaker AUD – however on balance i think they will retain their easing bias.
Even with this judgement, however, i don’t see a move in April. The easing from the financial market and commodity prices is still working its way through, and this takes pressure off the RBA. At this point, i still think that the next move is down, and judge that the earliest realistic easing window is at the May meeting, following the Q1’13 CPI report.
(Guessing) The March Statement:
Global growth outlook — unchanged. The better US data balances sequestration; China seems okay. The italian election jitters are the sort of instability the RBA has been expecting.
Commodity prices — watch for an upgrade. The RBA’s index was up again in Feb. A robust 3.6% increase in AUD terms (2.4% in SDR terms), taking the YoY decline to a modest 4.8% (7.2% in SDR terms). The declining AUD is helping out here.
Financial market sentiment — stable at a robust level. The way equities and credit handled the risk events of the past week is encouraging.
Domestic growth — this is where things get harder. The way the quarterly partials have been rolling in, it is hard to see the ~110bps of quarterly growth it requires to hit its Feb SOMP forecast of 3.5%yoy growth in the year to Q4’12, but the outlook may have improved.
Offsetting the current weakness is the decent Q4’12 Capex survey.
The RBA had been expecting a capex droop for 2013-14, but the first ABS survey suggests a plateau at ~8% of GDP in 2013-14. Without a capex droop, the period of sub-trend growth in the forward estimates (which really is the bit that monetary policy can hit) will be delayed (i do still think it must be traversed at some time).
This is not to say that things are going well, for they are not. The RBA has put the emphasis on GDP for some reason, when income measures that capture the terms of trade better tell the story.
This is why firms lack confidence and inflation has been weak – the aggregate economy has lacked for income growth. The recent increase in commodity prices should boost H1’13, and repair some of this damage.
In the inflation paragraph the RBA must balance up weaker than expected current conditions with a lower probability that their weak Feb’13 demand forecast (a period of sub-trend demand as the mining investment boom rolls off) will prove accurate. On net, i would hedge and leave this paragraph more or less the same. The Bank’s assessment is therefore likely to remain “that inflation will be consistent with the target over the next one to two years”.
I similarly expect that the monetary conditions paragraph will be mostly unaltered. The RBA may add something to acknowledge their pleasure at seeing a weaker AUD, but i think the probability is low. They may say it is more in line with fundamentals, given its lower level and higher commodity prices.
With all that, i expect that the RBA will retain their easing bias, but retaining the comment that the inflation outlook “affords scope to ease policy further, should that be necessary to support demand”. The risk is that they drop the easing bias due to capex, but that was only a first estimate, CPI may still be slowing, and current growth seems a bit sub-trend, so i expect it will remain.