The Reserve Bank of Australia (RBA) will announce its May monetary policy decision later today.
To say this is the most highly anticipated Australian interest rate decision in recent years is an understatement — this is the first time since the RBA last cut rates in August 2016 that a meaningful risk of a move is being priced in by financial markets.
With Australian economic growth decelerating sharply in the second half of last year and inflationary pressures weakening further in the first quarter of 2019, both markets and economists see the prospect of rate cut as a line-ball call.
Put simply, the RBA’s decision could go either way, ensuring there’ll be plenty of market volatility when the announcement drops.
Here’s the state of play.
- Of the 26 economists polled by Bloomberg, 14 expect the RBA will cut the cash rate by 25 basis points to a new record low of 1.25%.
- Australian cash rate futures put the odds of a 25 basis point rate cut at today’s meeting at 47%.
- According to analysis from Westpac Bank, since May 2002, the RBA has never eased policy settings when market pricing was less than 50% the day before a decision.
- Beyond the actual rate decision, markets will immediately focus on the final paragraph of the May statement, where the RBA provides its bias on the outlook for the cash rate.
- If the RBA doesn’t cut rates, it’s highly likely to adopt an explicit easing bias, indicating it’s likely to ease policy settings in the months ahead.
- Up until last month, the RBA said that: “taking account of the available information, 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”.
- At its April meeting, this was tweaked to say: “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”.
- Many regarded the change in language as a sign the RBA was moving towards the adoption of an explicit easing bias.
- In the absence of a cut, any further change in the final paragraph of today’s statement would almost certainly indicate that it’s likely to cut rates in the months ahead.
- Before the start of the RBA’s last easing cycle in May 2016, the prior statement noted that: “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”.
- If the RBA chooses to cut rates today, it may or may not decide to adopt a clear easing bias.
- When it last cut rates in August 2016, it said: “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”. The limited commentary reflected that the RBA cut rates at this meeting.
- Should it ease policy today, it should not come as a surprise if there is no explicit easing bias in the final paragraph of the statement.
- If the RBA cuts rates and adopts an explicit easing bias, it will have a substantial impact on Australian financial markets, bolstering confidence that it will deliver a series of cuts as markets currently expect. The RBA has never changed policy settings under the leadership of Philip Lowe, so past tendencies may not be repeated.
- Alternatively, should the bank not cut rates and not adopt an easing bias, it will see markets price out the chance of policy easing in the period ahead. This would be a major shock to markets, bringing into question the will of the RBA to return inflation to within its 2-3% target.
- It would also be a major surprise if the RBA cuts rates but adopts a clear neutral bias, indicating there’s unlikely to be another move in the near-term.
- TD Securities has had a look at the likely market reaction depending on what way the RBA chooses to go.
- In the remainder of the statement, the RBA will likely detail what changes there will be in its updated economic forecasts released on Friday.
- Prior to the release of its forecasts in February, the RBA said this regarding the outlook for Australian GDP growth: “the central scenario is for the Australian economy to grow by around 3% this year and by a little less in 2020 due to slower growth in exports of resources”. On inflation, it added: “the central scenario is for underlying inflation to be 2% this year and 2.25% in 2020.
- It’s highly likely to flag downgrades to its GDP growth and inflation forecasts today following recent weakness in official data released by the ABS.
- The scale of those downgrades will likely determine its updated forecasts on the outlook for Australia’s unemployment rate.
- Three months ago the RBA said: “a further decline in the unemployment rate to 4.75% is expected over the next couple of years”.
- With inflation already moving away from target, any acknowledgement that unemployment is unlikely to fall further may be enough to prompt a rate cut given it would imply even slower progress in lifting wage growth. Without an acceleration in wage pressures, sluggish household spending and weak domestic inflation is likely to persist.
- The remainder of the statement will likely play second fiddle to the commentary mentioned above, although there may be some modest tweaks to its views for the domestic housing market and external economy.
The policy statement, including the rate decision, will be released at 2.30pm AEST.
Business Insider will have full coverage as soon as it hits the screens.
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