ANZ: The RBA have changed their tune, and that means rates may be about to head lower

Glenn Stevens. Digital mischief: Peter Farquhar

Earlier this week the RBA released a November monetary policy statement that had something in it for everyone. The final paragraph of the document, in particular, caught the eye of many in the markets.

To recap, here it is:

At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

On one hand the board stated “that the prospects for an improvement in economic conditions had firmed a little over recent months”, indicating less likelihood that rates would be cut further, while on the other acknowledging “that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Essentially that indicates they are more confident about the economic outlook, but admit that with inflation still at incredibly benign levels, they can still cut rates if required.

They almost appear to be offsetting statements, making the final paragraph neutral in some investors’ minds.

However, based on some excellent detective work from Martin Whetton and Savita Singh, rate strategists at ANZ, they discovered that when the RBA board use a phrase akin to “inflation may afford scope for further easing” in its policy statement, it often is a precursor to a reduction in interest rates.

Here’s a chart that looks at changes in language towards the inflation outlook against movements in the cash rate, followed by an explanation from Whetton and Singh.

“The statement suggested the inflation outlook “may afford scope for further easing of policy, should that be appropriate to lend support to demand”. Similar statements have been used in the past in meetings leading up to an easing – in mid-2013 and mid-2012 (the latter in concert with more deliberate wording regarding the Bank’s intentions),” said Whetton and Singh.

Clearly, based on recent history at least, that suggests the RBA’s easing cycle may not be complete yet as many currently predict. The RBA never make such remarks off the cuff, they’re deliberate with every statement, speech and remark they make.

Markets will get further clarity on what the RBA is thinking today. Governor Glenn Stevens speaks at 9.25am AEDT in Melbourne while Philip Lowe, deputy RBA governor, appears before the FINSIA regulators panel discussion in Sydney from 1.10pm AEDT.

Every word they utter will be deliberate, and the markets will be paying attention to every statement they make.

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