The Reserve Bank of Australia (RBA) will announce its first interest rate decision for the year today.
While the cash rate is widely tipped to remain at 1.5% — where it has remained since August 2016 — today’s policy statement is perhaps the most anticipated since the bank last cut rates.
That’s because a lot has changed since we last heard from the RBA, not least that rather than pricing in that the next move in the cash rate will likely be higher, financial markets now believe there’s a greater than 50% chance that it will be lowered by 25 basis points by the end of this year.
The change in mindset — also seen among a handful of economists — reflects that economic data, both at home and abroad, has weakened noticeably since early December, creating renewed concern about the trajectory for the Australian and global economy in 2019.
As a result, the outlook for monetary policy settings for major central banks, especially the US Federal Reserve, has also shifted noticeably towards easier policy settings this year, again a very different mindset to that seen just a couple of months ago.
Given that backdrop, and the moves from other central banks, the question everyone is now asking is whether the RBA may abandon its previous view that the next move in the RBA cash rate will likely be higher.
Clues as to whether or not that is the case are likely to be seen in the February statement.
Here’s the state of play.
- Both financial markets and economists believe the RBA cash rate will remain at 1.5% today.
- Cash rate futures put the odds of a 25 basis point rate cut at just 2%. All 28 economists polled by Bloomberg expect the cash rate will be held steady.
- Given those low expectations, all interest today will fall on the RBA’s monetary policy statement. With the exception of Australia’s key commodity prices and the Australian labour market, there’s unlikely to be much for the RBA to crow about.
- On the outlook for the Australian economy, the bank will downgrade its GDP growth views for 2018 in response to the big undershoot seen in the September quarter last year. There’s a strong possibility it will also lower its GDP growth forecasts for both this year and next given recent trends in local and offshore data.
- Ahead of its updated forecasts that will be released on Friday, any changes will be flagged in today’s statement if prior form is anything to go by. In December, it said that it expects “GDP growth to average around 3.5% over [2018 and 2019] before slowing in 2020 due to slower growth in exports of resources”.
- Following a steep plunge in Australian business conditions in December, its view that “business conditions are positive and non-mining business investment is expected to increase” may also be downgraded, along with the assessment that the economy is “performing well”.
- Its view that “one continuing source of uncertainty is the outlook for household consumption” will remain in place given some fairly dire figures on the strength of Christmas spending. Australia’s December retail sales report will actually be released as the RBA is meeting.
- Fitting with recent Australian inflation data, its views on the outlook for prices are likely to be similar to those communicated late last year.
- Previously, it described inflation as remaining “low and stable”. It added that it is expected to pick up over the next couple of years, with the pick-up likely to be gradual. It said its central scenario is for “inflation to be 2.25% in 2019 and a bit higher in the following year”. If there’s a risk today, it will be that view will be downgraded to reflect a weak lift in both headline and underlying price pressures in the final quarter of 2018. Whether that eventuates or not will likely be determined by the RBA’s new GDP forecasts.
- On the labour market, recent data suggests the bank will retain the view that the “outlook for the labour market remains positive”. Unemployment sits at multi-year lows and job vacancies sit at record highs. However, growth in job ads has turned negative for the first since the middle of 2015, pointing to downside risks for hiring ahead.
- Depending on its updated GDP growth forecasts, it may soften its assessment that “a further reduction in the unemployment rate is likely”. The same can also be said for its view that wages growth will lift “gradually” over time. Australia’s Q4 wages report will arrive in mid-February.
- Given recent trends in Australian housing data, the risks today are that the RBA will acknowledge a further deterioration in conditions since it last met.
- Price declines across the capital cities have accelerated in recent months, led by 1% plus falls in Sydney and Melbourne. Building approvals have also tanked, falling to the lowest level in over five years. Housing credit growth has also continued to weaken, both for investors and owner-occupiers.
- Previously, the bank described conditions in the Sydney and Melbourne housing markets as having “continued to ease”. An increasing number of analysts believe it’s now gone beyond a mere “easing” in conditions.
- For the Australian dollar, the RBA will likely repeat that it remains “within the range that it has been in over the past two years on a trade-weighted basis”.
- It may strike a more optimistic assessment on commodity prices given recent strength in the bulks and a rebound in crude oil prices. In December, it noted that Australia’s terms of trade had “increased over the past couple of years and have been stronger than earlier expected”… helping to “boost national income”.
- Internationally, the bank’s assessment will likely be more cautious than two months ago when it said the “global economic expansion is continuing and unemployment rates in most advanced economies are low”. The latter remains true but recent indicators point to a slowing in the global economy, in some individual instances quite sharply.
- The bank will include discussion about a recent increase in financial market volatility and shift in central bank guidance.
- Watch for any change in the view that “a further pick-up in core inflation is expected”.
- Putting it all together, for the first time in a long time, it’s no certainty the RBA will retain a mild easing bias in the key final paragraph of the statement.
- In December, it said “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”. It added that keeping policy steady was “consistent with sustainable growth in the economy and achieving the inflation target over time”.
- Any tweak to suggest current policy settings are not consistent with inflation returning to target will signal that a further reduction in the cash rate is highly likely.
- The vast majority of economists don’t expect that will occur today, but the risk is clearly building given recent trends. The bank may choose to reinforce the view that while inflation is expected to return to target, that process could take even longer than previously thought.
The RBA policy statement will be released at 2.30pm AEDT.
Business Insider will have the statement up in full as soon as as it arrives. Further analysis will arrive soon after.
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