The Reserve Bank of Australia (RBA) will announce its June monetary policy decision on Tuesday.
To say expectations for a rate cut are elevated is an understatement. Almost everyone in financial markets expects the RBA will ease policy settings today.
Given a cut is deemed to be a near-certainty, the wording of RBA’s accompanying monetary policy statement will drive movements in financial markets in the absence of a shock decision to leave the cash rate on hold.
Here’s the state of play.
- The RBA hasn’t moved Australia’s cash rate since August 2016. It hasn’t increased official interest rates since late 2010.
- The current easing cycle is the longest on record, beginning all the way back in late 2011. Over that period, the cash rate has been reduced by a cumulative 325 basis points.
- When the RBA last cut rates, Glenn Stevens was the bank’s governor. Current Governor Philip Lowe has never adjusted policy settings before.
- At 33 months, the current stretch of policy stability is also the longest on record.
- Almost everyone expects that streak will end today.
- Financial markets are fully priced for a 25 basis point cut to be delivered, taking the cash rate to a new record low of 1.25%. 29 of 30 economists polled by Bloomberg are also forecasting that the cash rate will be reduced by 25 basis points today.
- Looking further ahead, financial markets and the vast majority of economists believe the RBA will deliver a follow-up rate cut by the end of year. Markets are looking for another cut by September at the latest, with another 25 basis point reduction seen as a very real risk either late this year or in 2020.
- Given those expectations, it would be highly unusual for the RBA to not cut rates. If it doesn’t ease policy settings it would create untold damage to its reputation in financial markets.
- In the absence of a shock decision to keep the cash rate steady at 1.5%, most interest in the accompanying monetary policy statement will be on the wording of the final paragraph in which the bank typically provides its bias on the outlook for policy settings.
- When the cash rate was last cut in 2016, the RBA simply noted the “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.
- This non-committal commentary on the outlook for interest rates may be repeated today, although no one can be really sure given Philip Lowe has never changed policy settings.
- TD Securities expects Lowe will follow the lead of his predecessor Glenn Stevens, ascribing a 70% probability that similar commentary will be found in the final paragraph of the statement.
- Like the concluding remarks from Lowe, there’s also plenty of uncertainty as to what the RBA may or may not say in the remainder of the June statement.
- Its view on domestic labour market conditions are likely to be less-optimistic, reflecting that a recent increase in Australia’s unemployment rate, coupled with a deterioration in some leading labour market indicators of late, has added to downside risks for already weak domestic inflationary pressures.
- Similarly, its views towards the domestic economic outlook may also be a tad softer given most of Australia’s Q1 GDP inputs have been weak.
- A recent moderation in the pace of home price falls, coupled with a modest improvement in some indicators such as auction clearance rates and possible easing in mortgage lending standards, may see the bank may convey a more optimistic assessment on current and expected housing market conditions ahead.
- Given recent news flow regarding trade tensions between China and the United States, it wouldn’t surprise if the bank highlighted increased risks towards the global economic outlook. It may also mention recent weakness in inflationary pressures in major developed economies.
- For those who didn’t read the RBA’s April statement, here’s Business Insider’s coverage from a month ago.
The RBA monetary policy statement, including the actual rate decision, will arrive at 2.30pm AEST.
Business Insider Australia will have full coverage as soon as it’s release.
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