Vanguard comments on RBA monetary policy statement

Vanguard | 05 February 2016


Fund manager Vanguard has commented on the Reserve Bank of Australia's February 2016 Statement on Monetary Policy, released this morning.

With the RBA announcing a hold for rates earlier in the week, and now releasing unchanged forecasts of 2.5 - 3.5 per cent growth for the economy in 2016 with expected inflation of 2.0-3.0 per cent in 2016, Vanguard Australia economist Alexis Gray says inflation, in addition to growth, will likely be a strong focus for the board over the next few months as it determines whether a cut to the official cash rate will be needed this year.

"If growth remains subpar, the RBA may need to cut interest rates by 25 to 50 basis points by year-end. Even if growth strengthens in line with the RBA's forecasts, the board may feel an interest rate cut is needed to prevent inflation from falling below 2-3 per cent growth," Ms Gray said.

"It is clear that lower oil prices placed downward pressure on inflation in 2015, and with further price declines in early 2016, inflation may fall further. The RBA acknowledge the downside risks to inflation, however they left their inflation forecast unchanged.

"At this stage the RBA has shaken off concerns about China's economic slowdown and recent market volatility, in part because of the recent improvements in the labour market, but the board will need to keep a close eye on domestic activity for any signs of a spillover."

Ms Gray also urges investors not to make drastic changes to their portfolios based on recent economic data, saying the merits of holding a range of asset classes is still the best approach at times when perceptions of a slowing economy drive market volatility.

"Be careful not to make drastic asset allocations based on what's happened recently in the equity market. Emotional decisions can often be the most harmful, and an investor's decisions should be based on their investment horizon and risk appetite, rather than recent market moves."

If anything, markets are already priced based on a lacklustre outlook, so there is potential for the Australian market to outperform current expectations.

Read the Reserve Bank of Australia's February 2016 Statement on Monetary Policy here.