'Significant' and 'surprising': The RBA may be moving closer to cutting interest rates again

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If you want to know what the RBA intends to do with interest rates, you best look at the final paragraph of its monthly monetary policy statement.

It’s where the bank communicates the reasoning behind its rates decision, along with what it expects to do with policy settings in the period ahead.

In April, Westpac’s Chief Economist Bill Evans believes a “significant” and “surprising” tweak was made.

For those who haven’t read the April policy statement, here’s what the RBA said in the final paragraph. Our emphasis in bold.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.

We highlighted the final sentence for a reason. It’s the one that Evans believes is significant.

Here’s a short snippet from a research note he released following the April Statement explaining why.

Our research shows that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016. Also note that the key concluding sentence, which has been used in every Statement since October 2016 has been “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. The clear implication behind that statement is an expectation that policy was likely to be on hold for a considerable period. As we have seen, that was an accurate assessment.

In the April Statement, he has changed this language for the first time ever. He still notes that “the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting”. However, he then changes tact with a new sentence. “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”. Although, a cursory glance at this sentence might not indicate any change in stance, it does give greater emphasis to the fluidity of the current situation. If this change was not intended, then clearly he would have continued with the approach that has marked his time as Governor.

Therefore this change appears to be a very clear intention to signal that policy is much more ‘live’ than has been the case since the Governor was appointed.

By “live”, Evans is saying the RBA may be far closer to tweaking policy settings, in this instance a rate cut.

While he was a “little surprised” by the RBA’s change in stance, Evans says the tweak is “consistent with our general view that the RBA is on track to adopt an easing bias in May and cut the overnight cash rate in August and November”.

Evans was not the the only economist to take interest in the final paragraph of the April statement.

“It makes sense to view today’s statement as another step in the direction of a formal easing bias,” said Sally Auld of JP Morgan.

Ivan Colhoun of the National Australia Bank was another who believes the tweak is a step towards reducing interest rates again.

“The statement suggests a further step toward considering easing interest rates to support growth and the return of inflation to target,” he said.

“The risk of a move at the May Board meeting has increased as it includes the Bank’s major quarterly forecast update and will likely incorporate downgrades to 2019 growth forecasts and likely core inflation as well.”

Financial markets are now fully priced for the RBA to deliver 50 basis points of easing by the middle of next year. If they’re correct, that will leave the Australia’s cash rate at a new record low of 1%.

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