Colonial First State
By Carlos Cacho, Analyst, Economic and Market Research Colonial First State Global Asset Management
The Reserve Bank of Australia (RBA) Board met on 1 August and left the official cash rate on hold at 1.5%, as widely expected. There has been no change in the official cash rate since August 2016.
In contrast to the strength in business confidence, consumer confidence was weaker, falling 1.2% for August and below its long-term average.
The S&P/ASX 200 Index finished the month largely flat, for the third consecutive month. This return masked some considerable divergence in the performance of various industry sectors.
Hurricane Harvey led to widespread destruction in Texas that will require a significant recovery effort. This also saw a sharp increase in gasoline prices.
A downward trend in bond yields continued in August, as investors took shelter in safe-haven assets in the face of geopolitical unrest.
The RBA continues to balance three key risks in the economy for their monetary policy deliberations:
- the outlook for inflation,
- the strength or otherwise of the labour market, and
- Household financial
The RBA released its quarterly Statement on Monetary Policy (SMP). The key development in the SMP was a slight downgrade adjustment to the near-term GDP growth forecasts for Australia, and a slight upward adjustment to the headline inflation forecast. The GDP estimate for year-end 2017 has been revised down to 2%– 3%, from 2.5%–3.5% in the May edition. The June 2018 figures now have the mid-point for growth at 3.0%, down from 3.25%. These lower forecasts were driven by a weaker Q1 GDP result and tighter financial conditions, primarily driven by a stronger Australian dollar.
The headline CPI forecast for June 2018 and December 2018 was revised to 1.75%–2.75%, up from 1.5%–2.5%. This was driven by an upward revision to utility prices, despite the stronger AUD.
The NAB business survey for July showed business confide