Westpac preview of the Reserve Bank of Australia monetary policy August meeting (August 1) & Statement on Monetary Policy (August 4)

I've summarised, and focused on the comments on the AUD.

RBA to keep rates on hold ... interest ... will be with the Governor's associated Statement

Labour market and the housing markets ... the key areas of interest

  • the Governor's speech on July 26 indicated that there was limited confidence in the call that wage rates would gradually increase over the course of the forecast period.

Australian dollar

  • Since the last Board meeting the AUD has increased from USD 0.76 and a TWI of 65 to USD 0.795 and TWI of 67.
  • Even at USD0.76 the Governor repeated his consistent call that "an appreciating exchange rate would complicate this adjustment." The language is likely to strengthen at USD 0.795. In his speech on July 21 the Deputy Governor noted: "a lower AUD would be helpful."
  • In mid-2015, when the AUD was adjusting, the "path" from USD 0.80 to USD 0.75 was consistently associated with: "Further depreciation is likely/necessary."
  • It seems likely that the "commentary" on the AUD in the Governor's Statement will be stronger than we have seen recently but we cannot be sure that a new "terminology" will be adopted.
  • Be clear that even though the move in the AUD is associated with higher commodity prices the RBA is uncomfortable.
  • The clear offset to services; manufacturing; and agricultural exports that we might expect from higher commodity prices is not materialising. Cashed up mining companies are not reinvesting and are not lifting employment in this cycle largely because they are not convinced of the sustainability of the current increases. As such the higher AUD is a "challenge" for both growth and inflation.

(bolding above is mine)

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The second RBA report for the week will be more significant - The Statement on Monetary Policy ... will contain the Bank's revised growth and inflation forecasts.

  • Forecasts will be provided out to end calendar 2019

The key forecasts from a policy perspective are GDP growth in 2018 and underlying inflation in 2018 and 2019

  • In May, GDP growth in December 2018 was forecast at 2.75%-3.75% and underlying inflation at 1.5-2.5% in 2018 and 2-3% in June 2019.
  • For 2019 ... RBA to restate key underlying inflation forecasts of 2.0% for 2018 and 2.5% for 2019. The 2018 growth forecast to remain at 3.25%, while higher dollar a concern positive data globally and domestically provides some comfort.
  • RBA is likely to restate their 3.25% growth forecast for June 2019 and to also forecast 3.25% for December 2019, which rolls into the forecast horizon.