Australia: 'July surprise' coming from the RBA? – Deutsche Bank

With the Australian labour market showing signs of improvement, Adam Boyton, Chief Economist at Deutsche Bank suggests that they think, the RBA could join the chorus of hawkish central banks in next week's post-meeting statement.

Key Quotes

“With a range of central banks having surprised markets in recent weeks with a shift to more hawkish rhetoric, might the RBA do the same in next week's post meeting statement?”

“Looking through the statement from the June meeting, it does appear clear that the only changes the Bank can make are in the more hawkish direction.”

“The weakness in GDP growth over the year to the March quarter is easily dealt with by a few minor changes in the relevant paragraph.”

“It may be too early, although we suspect that the apparent pick-up in the labour market could well give the RBA more confidence that wages growth will pick-up as their forecasts suggest. As a result, the Bank may also tweak the extract above in a more hawkish direction, perhaps noting that: 'the signs of improvement in the labour market suggest that wages growth could lift over coming quarters'. Such a shift to a more forward looking stance might also see the Bank change the tense in the final sentence so it reads: 'Slow growth in real wages has been restraining growth in household consumption'.”

“On balance, it is probably too soon for the RBA to shift the policy assessment from the neutral tone in June, although if there are shifts these can, in our view, only be in the hawkish direction.”

“Despite what the Bank does in the statement next week, our own views on the outlook for the cash rate are unlikely to change. In the first instance we doubt the Bank would move rates ahead of seeing some broader signs across wages, GDP growth and inflation that the economy was panning out as they expect.”

“In the second instance we reconcile the strength in employment and the softness in GDP growth as implying zero productivity growth. That in turn entrenches weak wages growth and weakness in household incomes.”

“Finally (and for the record) we expect the cash rate to remain at 1.50% next week. Anything else would be a real July surprise.”