RBA Observer: On hold next week, but next move likely to be up
• Activity indicators are lifting and this month brought more news that the labour market is also improving
• Inflation has already passed its trough, the housing market continues to boom and the cash rate is still at its
historic low
• It seems likely that the RBA will soon need to consider that rates should start to head towards neutral: we
expect that the cash rate may need to rise before year-end
Growth and inflation are picking up
Local activity indicators are continuing to show that growth in Australia is rebalancing from being led by mining
investment, as it has been in recent years, to being driven by the non-mining sectors of the economy. GDP picked up pace
in Q4, supported by consumption and exports. In addition, retail sales are growing at their fastest rate since 2010, the
housing market continues to boom, the forward-indicators of residential construction have picked up strongly and the
business sentiment is at significantly higher levels than it was around the middle of 2013. Inflation has also lifted
and appears to have passed its trough, which is another sign that demand has been picking up.
These facts alone might suggest that the current very low cash rate may not be the appropriate monetary policy setting
and that rates should be lifted soon. But two key caveats remain: the labour market remains weak, with the unemployment
rate at its highest level in 10.5 years; and, mining investment is set to fall further this year and next.
On both these factors we are more sanguine than many other commentators. We see the labour market as merely lagging the
pick-up in activity that has already begun. We have long been arguing that as the economy shifts to being more driven by
the non-mining sectors, employment growth should lift. After all, that is where most of the jobs are! The mining sector
employs only a small number of people. This month brought support for our view with strong employment numbers in
February.
With regard to the expected fall in mining investment, we forecast that it will be more than offset by a pick-up in
resources exports, as new capacity comes on-line, and falling imports (recall that much of the capital for the mining
investment was imported).
The past month has seen the market focus shift to the local data, consistent with our view that inflation and jobs are
the keys for determining the RBA's next move. We expect the RBA to be on hold for the next few months, but for rates to
rise before year-end.
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ENDS