No one expects the Reserve Bank of Australia to cut rates today.
However, just because the bank is expected to leave rates unchanged at a record-low level of 1.5%, that doesn’t mean there’ll be no interest in the release. Far from it – there’s still the monetary policy statement to digest, and all the nuances found within it.
Given a majority of economists and those in markets still believe that another rate cut will be delivered in the current easing cycle, there’s likely to be some modest market movement following its release as these expectations shift, one way or another.
As he does best, Prashant Newnaha, interest rates strategist at TD Securities, has been running his ruler over what to expect in the statement, and how the markets are likely to react regardless of what’s delivered.
Here’s his excellent flowchart on what to expect.
Reflecting the view expressed by markets and economists alike, Newnaha attaches a 99% probability that rates will be left unchanged. Some may even deem those odds of a cut to be generous.
In the accompanying monetary policy statement, he attaches an 80% probability that the board will deliver a neutral rates bias in the final paragraph, an outcome that would mirror what was communicated in the June monetary policy statement after the bank cut rates to 1.75% in May.
Should that eventuate, he expects around a 30 pip move higher in the AUD/USD, along with a modest selloff in Australian cash, three and 10 year bond futures.
The outlier, says Newnaha, is for the board to deliver a downgraded assessment towards the global economy, attaching a 20% probability of such an outcome occurring. Even if they do, he suggests it’ll be highly unlikely that the board will insert an explicit easing bias, something that would suggest that another rate cut is likely.
Should this outcome arrive, Newnaha expects that the Australian dollar will weaken and debt futures to strengthen, reflective of the increased likelihood of another rate cut being delivered.
“We expect the meeting should proceed without any controversy over policy,” says Newnaha. “Accordingly we expect little change in the statement but anticipate rates markets are more likely to sell off than rally.”
Putting him at odds with the majority of economists and those in markets, Newnaha doesn’t see the RBA cutting rates again in the current easing cycle.
“We cannot recount a period that the RBA cut rates after 3 successive CPI prints. On this metric, the odds of the RBA cutting again in November are low,” he says.
“Indeed, history shows that after the RBA has cut rates twice it has historically moved to the sidelines to ‘assess the impact of the prior rate cuts’. Also, the minimal pass-through from the Aug rate cut warrants no urgency for the RBA to cut rates again so soon.
“With activity data confirming no need for the RBA to cut any time soon, the Bank’s trigger to cut will depend a lot on the Q3 CPI outcome.”
Here’s the current probability of a further 25 basis point rate cut being delivered, according to OIS pricing. The chart comes courtesy of TD Securities.