- The RBA made a significant move today, signalling the next move in Australia’s cash rate could be up or down.
- It had previously stated that the next move was likely to be higher.
- Financial markets are nearly fully priced for a 25 basis point rate cut to be delivered by February next year.
- Economists believe Australia’s jobs market will determine whether or not markets will be proven right.
After suggesting for the best part of a year that the next move in Australia’s cash rate was likely to be higher, the RBA now isn’t so sure.
According to RBA Governor Philip Lowe, the probability of the next move in the cash rate is now “more evenly balanced”.
This is a significant development and the RBA will have been exceptionally careful in choosing its language and timing.
Financial markets — having priced in around a 50% chance of a 25 basis point cut within the next year earlier this week — are now almost fully priced for a cut to occur by February next year.
“Today’s comments by the RBA Governor are a green light for the market to price in cuts with confidence,” said Sally Auld, Chief Economist at J.P. Morgan in Australia.
“A full 25 basis point cut is now largely fully priced in for February 2020.
“As the old saying goes, if the RBA aren’t hiking, then they must be easing.”
As for whether market pricing will prove to be right or wrong, Auld says it’s likely to be determined by domestic labour market conditions, a by-product of how both the domestic and global economies fare in the period ahead.
“J.P. Morgan forecasts currently envisage a decent sequential pickup in global growth from the March quarter to June quarter of 2019,” she says.
“Domestically, we also expect December quarter GDP growth last year to improve relative to the Q3 outcome, although recent data has left us with downside risks to the current forecast.
“Activity data that feed into March quarter 2019 GDP estimates are thin on the ground, but the survey numbers we have seen are not encouraging.”
At this juncture, Auld says her forecasts are consistent with unchanged policy from the RBA.
“Any sign of further slowing in forward indicators of the labour market will be significant for the policy outlook,” she says.
Su-Lin Ong, Chief Economist and Head of Australian Research at RBC Capital Markets, is another who says the jobs market will play a key role in determining what will happen next.
“Reading between the lines, it is clear what it would take for the RBA to cut rates: a deterioration in the labour market, which is consistent with our long-held view that this suite of indicators is key in policy deliberations,” she said in a client note.
“A rise in the simple but key metric — the unemployment rate — will see a further shift in the RBA’s language and bias.
“Whether this is triggered by much weaker global growth or a sharper slowdown in domestic demand may be immaterial, but we continue to think this would demand much weaker international conditions with clearer negative implications for Australian growth, labour market, and inflation.”
Like J.P. Morgan, RBC Capital Markets sees the cash rate remaining at 1.5% for the foreseeable future having removed its call for 50 basis points of tightening over the next two years prior to today’s shift in RBA mindset.
“Uncertainty and unusual risks argue for patience and flexibility,” Ong says.
The Commonwealth Bank, one of Australia’s most hawkish RBA forecasters prior to today, has abandoned its view for the RBA to lift the cash rate this year, pushing back the expected timing of the first policy tightening until November 2020.
Other forecasters who were forecasting near-term rate hikes are likely follow suit. Some who were previously forecasting a steady cash rate may also join the likes of AMP Capital, Market Economics and Capital Economics, among others, in calling for rate cuts.
The RBA cash rate last moved in August 2016, a 25 basis point rate. The last time the RBA hiked the cash rate was late 2010.
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