The Reserve Bank of Australia (RBA) will announce its September interest rate decision today, an event that’s likely to attract plenty of attention, especially compared to previous months, despite widespread expectations that the official cash rate will be left unchanged for a record 25th consecutive month.
The reason for this extra interest is simple — the domestic data flow hasn’t been too flash since the bank last met just four weeks ago, particularly when it comes to housing market indicators which have been universally softer.
One of Australia’s four major banks, Westpac, has also announced an out-of-cycle increase to its variable mortgage rates, joining other smaller lenders in lifting borrowing costs for households. Given the likelihood that Australia’s other major lenders could follow suit, it has clouded the outlook for the housing market, the broader economy, along with the outlook for official policy settings.
The international backdrop is also no better with trade tensions between the United States and its major trading partners no closer to being resolved, casting a shadow over the outlook for the global economy in the final months of the year.
However, with the RBA continuing to believe that the next move in official interest rates is likely to be up, putting faith that lower unemployment will lead to faster wage growth and an eventual lift in inflationary pressures, whether the murky backdrop will be enough to see the bank change its glass-half-full mindset remains debatable.
We’ll find out the answer to that question later today.
Here’s the state of play.
- Economists believe there’s next to no chance the official cash rate will move today. Of the 25 polled by Bloomberg, all expect it will remain at 1.5%.
- Financial markets share a near-identical view with cash rate futures, actually pricing in a minuscule chance of a 25 basis point cut at today’s meeting. Futures traders aren’t pricing in any chance of 25 basis point increase until the latter latter parts of next year, and even then the odds are still be deemed to be less than 50% by early 2020.
- Given the view official interest rates will be left on hold for the foreseeable future, markets will be looking for any signs in the RBA’s monetary policy statement that the bank is losing confidence that the next move in official rates is likely to be higher.
- In particular, there’ll be plenty of focus on what it has to say regarding housing, wholesale funding costs, household spending, business investment, the Australian dollar along with its assessment towards the global economy.
- Given the data flow since the bank last met, the risks are that it may strike a more downbeat assessment on current housing market conditions.
- In August, it described conditions in the Sydney and Melbourne housing markets as having “continued to ease and nationwide measures of rent inflation remain low”. It removed the reference to nationwide measures of housing prices being “little changed over the past six months” used in July.
- According to latest data from CoreLogic, prices fell in a majority of capital cities last month, and in regional centres, leaving values down 1.1% over the past quarter, and 2% over the year.
- Linked to continued declines in home prices in many parts of the country, there’ll be close scrutiny on what the bank has to say about wholesale funding pressures, especially as Westpac has followed other smaller lenders in lifting variable mortgage rates for its customers.
- In August, it said that money-market interest rates are “higher than they were at the start of the year, although they have declined somewhat since the end of June”. It added that “some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago”.
- Given wholesale funding costs are starting to increase as we approach quarter-end, and the move from Westpac, there’s a strong possibility these views will be tweaked today.
- Following a disappointing private capital expenditure report last week, revealing that business investment among non-mining firms may slow or even peak in the coming quarters, there’s also a small risk the bank may downgrade its assessment that “business conditions are positive and non-mining business investment is continuing to increase”.
- The view that “one continuing source of uncertainty is the outlook for household consumption” will likely be retained given falling consumer confidence and flat retail sales growth in July.
- Ahead of Australia’s GDP report on Wednesday, look out for any possible changes to the view that Australian GDP growth is “expected to average a bit above 3% in 2018 and 2019”. Despite the risk that Q2 GDP may undershoot the bank’s latest forecasts, its view is likely to be retained.
- Given a lack of new information, the bank’s views on inflation are likely to be the same. Any changes will likely reflect that Australia’s Q2 CPI report is now over two months old.
- Like inflation, its commentary on labour market conditions is also likely to remain optimistic despite a fall in employment growth in July and continued softness in job ads.
- Employment growth is still faster than “growth in the working-age population” and unemployment is still falling, fitting with the view that it’s expected to fall to “around 5%” over “the next couple of years”.
- It’s commentary on the outlook for wage growth will likely remain the same given recent data released by the ABS.
- Despite recent declines in the Australian dollar against both the greenback and in trade-weighted terms, it’s likely to repeat that it “remains within the range that it has been in over the past two years”. It still is.
- Globally, it’s likely to maintain the view that “one uncertainty regarding the global outlook stems from the direction of international trade policy in the United States”. Of note, it described the global economic expansion as “continuing” in August.
- While some analysts disagree, it’s likely to repeat that holding the stance of monetary policy unchanged would be “consistent with sustainable growth in the economy and achieving the inflation target over time” in the final paragraph of the statement.
- If there is any tweak to the final paragraph it will create a major talking point and generate some financial market volatility, particularly if less confident than the views conveyed in recent months.
The RBA’s policy statement, including the rate decision, will be released at 2.30pm AEST.
Business Insider will have all of the talking points as soon as it hits the screens.
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