The outlook for benchmark interest rates is always a major focus for markets, and analysts are constantly searching for clues on which direction rates are heading.
If you’re trying to predict the future path of interest rates in Australia, it helps to pay close attention to what the RBA is saying.
With that in mind, ANZ economists Giulia Lavinia Specchia and David Plank have constructed a forecasting tool, based on computational analysis of RBA statements which accompany the bank’s monthly interest rate meetings.
They compared the actual change in benchmark interest rates, plotted against their forecasting model with a six month lead:
“The most recent post-meeting statements have taken the Index a little above one. This indicates the RBA’s policy bias is starting to lean in a slightly hawkish direction,” the pair said.
The bias index uses a computing algorithm to scan each RBA statement since 2008, and find passages of text which converge around a particular theme.
In this case, the direction established by Plank and Specchia was whether the context of the wording was more “hawkish” or “dovish”.
A hawkish outlook suggests that a central bank is preparing to raise interest rates, while a dovish tone signals the opposite.
The two economists then ran the sections of text through a google search based on the key words.
Plank and Specchia noted that the Bias Index fell below one in 2014, and continued to trend lower until February last year.
“This implies that the RBA’s communication and forward guidance turned progressively more dovish over that period,” they said.
In February 2016, the benchmark cash rate was 2.0%. Over the following six months, the RBA cut rates again in May and August — not a bad testament to the model’s powers of prediction.
Since then, the tone of the Reserve Bank’s statements has started to lean in a more hawkish direction.
Plank and Specchia partly attributed that to a change in governor, with current head Philip Lowe succeeding Glen Stevens in September last year.
Under Lowe, the tone of the RBA’s statements has shifted to more of a focus on financial stability.
Although ANZ’s bias index has moved above one, the signal isn’t yet strong enough for the two economists to alter their current outlook, which is for benchmark interest rates to stay on hold at 1.5%.
That’s a view shared by the broader market, as the RBA balances the competing forces of low wage growth and low inflation with rising house prices and high household debt.
In comparing their model to current market pricing for future changes in interest rates, Plank and Specchia also found a close correlation.
This chart shows the move in ANZ’s bias index on the left hand side, compared to the market’s forecast for the direction of interest rates over the next 12 months.