We’ve finally heard from the RBA — this prominent board member says the next move in the cash rate will be up

  • Ian Harper, RBA Board member, still thinks the next move in Australia’s cash rate is likely to be higher.
  • Financial markets disagree wholeheartedly with that assessment, pricing in a greater than even chance the cash rate will be lower by the end of the year.
  • Harper’s intervention could be interpreted as an attempt to diminish rate cut expectations that have slowly built since early December.
  • Australia’s crucial Q4 CPI report will be released tomorrow. It could have a major influence on what the RBA will do next with policy settings.

Financial markets are pricing in a greater than 50% chance that the Reserve Bank of Australia (RBA) cash rate will be lower by the end of this year.

A small but growing number of economists, including from AMP Capital, Market Economics and Capital Economics, also share this view.

However, not everyone believes the next move in the cash rate will be lower.

Ian Harper, one of nine policy-setters on the RBA Board, still thinks the next move is likely to be higher.

“The domestic economy, everything I’ve seen, shows that it is still strong,” Harper said in an interview with the Wall Street Journal (WSJ).

Harper told the WSJ that his personal view is that the next move in interest rates will be upward, echoing public statements from the RBA late last year.

Harper famously said last year that if the RBA is making progress towards achieving its inflation mandate, “who cares what’s happening to house prices”.

Despite taking a toll on Australia’s residential construction sector, seeing building approvals drop sharply late last year as property price declines accelerated, and growing evidence that the negative wealth effect on household balance sheets is starting to influence consumer behaviour and spending, it appears Harper’s view hasn’t changed in early 2019.

“So long as jobs growth is strong and unemployment is low, then fears about some sort of collapse in consumption, or inability to be able to pay bills, really have to be put way down the list” [of policy concerns],” he said.

In December, Australia’s unemployment rate fell to 5%, leaving it at the lowest level since June 2011. While it has slowed compared to what was reported in 2017, Australian employment growth continued to hum along at a decent clip last year, increasing by over 270,000. Most of those jobs were also full-time positions.

Harper told the Journal that there has been no sign that consumers are cutting back spending to rebuild savings buffers, a result that likely reflects recent household savings and retail sales data released by the ABS.

While he says that it’s his personal view that the next move in interest rates will be up, not that of the entire RBA Board, it’s likely his remarks are an attempt to reduce growing market expectations that the next move in the cash rate will be lower ahead of a slew of RBA policy statements that will be released next week.

When we last heard anything publicly from RBA, the board continued to put faith in stronger labour market conditions to help gradually reduce unemployment and lift wage and inflationary pressures in the coming years.

“Members assessed that the current stance of monetary policy would continue to support economic growth and allow for further gradual progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target,” it said in the minutes of its December monetary policy meeting.

“In these circumstances, members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy.

“Rather, members assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds.

“Members 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.”

However, while the RBA — almost two months ago — saw steady policy settings as consistent with achieving its inflation target over time, financial markets are now unconvinced that remains the case.

Having previously adopted the RBA’s view that the next move in the cash rate would likely be higher, sentiment has done a sharp about-face since early December, sparked by a sharp slowdown in the Australian economy in the September quarter, increasing concern that sluggish growth in the economy won’t lead to the RBA achieving its inflation mandate.

Accompanied by increased concern about the health of the global economy, along with a string of weak domestic data readings in the December quarter, has only seen those concerns grow, helping to explain why a rate cut by year-end is now favoured by financial markets.

Put bluntly, markets, collectively, have lost faith that the RBA’s optimistic outlook for the Australian economy will be replicated in reality.

Whether that changes in the near-term will be determined by Australia’s December quarter consumer price inflation (CPI) report, released tomorrow.

For yet another quarter, the RBA is expected to miss its 2-3% annual inflation target. One notable forecaster not only sees underlying inflation missing the RBA’s target, but moving further away, an outcome that will do little to alter the view that a rate cut could be on the cards.

Beyond that release, separate data on retail sales and home prices will also be released in the coming days, providing an indication as to whether Harper is right that downturn in the housing market is not leading to consumers cutting back spending.

Based on what was reported in Australia’s national accounts in the three months to September, and in recent alternate spending indicators for the December quarter, there’s mounting evidence to suggest it is.

Should that be replicated in official retail sales data from the ABS, the RBA may have a tough time convincing markets that steady policy is warranted, let alone that the next move in the cash rate is still likely to be higher.

We’ll find out whether the RBA, like Harper, still thinks the next move will probably higher next week.

Not only will the RBA announce its first interest rate decision for the year on Tuesday, but that will be followed up by a speech from Governor Philip Lowe on Wednesday ahead of updated economic forecasts from the bank in its quarterly statement on monetary policy on Friday.