Shortly before the horses jump in the 2018 Melbourne Cup, the Reserve Bank of Australia (RBA) will announce its November interest rate decision.
In complete contrast to the Cup, there’s no doubt as to what the result will be — the cash rate will be left unchanged at 1.5%, extending the period of policy stability seen since August 2016.
However, given this meeting follows Australia’s September quarter consumer price inflation (CPI) report last week, and comes ahead of new economic forecasts from the RBA on Friday, there’s still likely to be plenty of attention on today’s monetary policy statement.
In particular, the RBA will likely flag any potential changes to its forecasts for inflation, unemployment and GDP growth, providing an indication as to what it may do with interest rates in the period ahead.
That alone means there’s the potential for some short-term volatility in Australian financial markets, especially should the RBA convey a different message to what’s been heard umpteen times before.
That’s unlikely, but it’s a risk nonetheless.
Here’s the state of play.
- The RBA cash rate hasn’t moved since August 2016. That’s 26 months, or 24 meetings, since the last change, the longest stretch of policy stability on record.
- Financial markets and economists expect that trend will extend today. All economists polled by Bloomberg expect the cash rate will remain at 1.5%. Financial markets are also certain it will remain unchanged.
- By the end of next year, interest rate traders put the odds of a 25 basis point increase in the cash rate at around 50%. Economists are a little more optimistic with the median forecast looking for it to sit at 1.75%.
- Given expectations for a near-term movement are slow low, that means all attention today will once again be on the policy statement for clues as to what the RBA is currently thinking.
- At the forefront of investors’ minds will be what changes, if any, the RBA may announce to its forecasts for inflation, unemployment and GDP growth over the next two years. It tends to flag any impending tweaks in the monthly statement ahead of the SoMP release.
- The medium and longer-term forecasts for GDP growth and inflation are likely to be much the same — the economy will be seen to growing at 3.25% this year and next, helping to slowly push underlying inflation back towards the midpoint of the RBA’s 2-3% annual target.
- With unemployment recently falling to a 6-year low of 5%, the RBA will probably lower its unemployment forecasts below 5% for 2020, likely to 4.75%.
- Outside of prepping markets for any forecast changes, there’ll also be plenty of interest on what the RBA has to say about broader conditions in the economy, labour market conditions and, of course, the housing market.
- On the broader economy, the bank will likely retain the view that its central forecast remains for “growth to average a bit above 3% in 2018 and 2019.”
- It will likely repeat that business conditions are “positive”, and non-mining business investment is “expected to increase” with public infrastructure investment and growth in resource exports “supporting the economy”.
- Given recent weakness in Australian retail sales and new car sales, it will almost certainly repeat that “one continuing source of uncertainty is the outlook for household consumption”. It is.
- As yet, the RBA has not discussed the relatively steep decline in residential building approvals seen in 2018, nor recent weakness in non-residential building approvals. Today could well be the day.
- On the broader housing market, markets will be looking for any sign the bank is becoming more concerned about the recent Sydney and Melbourne-led downturn.
- It previously described conditions in the Sydney and Melbourne housing markets as having “continued to ease” with nationwide measures of rent inflation “low”. Based on updated data received since it last met, those trends have remained the same.
- Given recent softer outcomes, it may downgrade its view that “growth in credit extended to owner-occupiers remains robust”. It will likely repeat that “credit conditions are tighter than they have been for some time”.
- With unemployment unexpectedly falling to 5% in September, where the RBA expected it to sit by the end of 2020, it will probably repeat the view that the outlook for the labour market “remains positive” despite a recent divergence in leading labour market indicators.
- In October it said “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5%”. Look for the RBA to upgrade that view today.
- It’s likely to repeat that while wages growth remains “low”, it has “picked up a little”. The view that an improvement in the economy “should see some further lift in wages growth over time” will also be repeated. We’ll get an update on wage growth for the September quarter later in the month.
- Despite undershooting market expectations in the September quarter, the RBA will likely flag no major changes to its inflation forecasts, even with projections for lower levels of unemployment.
- Previously it said that it expects inflation to be “higher in 2019 and 2020 than it is currently”.
- Its view on the Australian dollar and domestic financial market conditions will probably be the same.
- Internationally, the RBA will likely note recent volatility in stocks, along with higher global sovereign bond yields.
- Given mixed GDP data from both advanced and developing economies over the past month, there’ll be some interest as to whether it will expand upon the view that the global economic expansion is “continuing”. “A number of advanced economies are growing at an above-trend rate and unemployment rates are low,” it said in October.
- Its views on the outlook for inflation globally, and the biggest uncertainty being the “direction of international trade policy in the United States”, will likely be the same.
- With some signs the global economy is moderating, and with inflationary pressures still low domestically, the easiest decision the board will make today will be to keep the final paragraph of the statement unchanged.
- “The low level of interest rates is continuing to support the Australian economy,” it said in October. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual… [and] 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.”
- That is, while it thinks inflation will gradually lift back towards its target, until it’s more confident that will eventuate, the cash rate will remain steady.
For those looking to do the daily-double of parlaying the RBA decision into the Melbourne Cup, the statement will be released at 2.30pm AEDT, 30 minutes before the horses are scheduled to jump.
We’ll have all of the major talking points covered before the race literally stops the nation.
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