ANZ says there are clues beyond RBA forecasts on the outlook for interest rates

Sherlock/BBC
  • The Reserve Bank of Australia (RBA) will release its quarterly statement on monetary policy (SoMP) on Friday, including updated forecasts on unemployment, GDP growth and inflation.
  • The forecasts will likely show faster GDP growth this year and next, lower unemployment and inflation potentially returning to the midpoint of its 2-3% medium-term target by the end of 2020.
  • Along with the forecasts, ANZ Bank says the focus of discussion in the SoMP also offers clues as to what will be the key areas for policy consideration in the period ahead.

The Reserve Bank of Australia (RBA) will release its quarterly statement on monetary policy (SoMP) on Friday, including updated forecasts on unemployment, GDP growth and inflation.

Based on the commentary Governor Philip Lowe offered in his post-meeting statement earlier this week, the forecasts will likely show faster GDP growth this year and next, lower unemployment and inflation potentially returning to the midpoint of its 2-3% medium-term target by the end of 2020.

Such a scenario will only help strengthen the view that the next move in official interest rates is likely to be higher, as the RBA flagged on numerous occasions already this year.

However, while the RBA clearly expects that faster economic growth will help to lower unemployment, boost wages and lift inflation back to target, what markets really want to know is what factors, if any, could potentially see the bank change its view that the next move in the cash rate is likely to be up.

To Jack Chambers and David Plank, members of ANZ Bank’s Australian economics team, the likely answer will come from the proportion of the SoMP devoted to key policy topics such as inflation, economic growth, the labour market and the outlook for housing.

“Previously, we found that topic selection has an impact on market rates, over-and-above the impact of the changes in the forecasts themselves,” they say.

This chart from ANZ looks at the the evolution in the proportion of the SoMP dedicated to discussing the key policy topics nominated above.

ANZ Bank

Interestingly, the proportion of recent SOMP’s devoted to the labour market has risen substantially, suggesting its importance in determining the outlook for policy settings has also increased.

Given faster economic growth will, in most circumstances, help to reduce unemployment and place upward pressure on wages and inflation, it too has become more prominent in recent discussion.

In the past, Chambers and Plank note that increased discussion towards both GDP growth and inflation has often occurred before the RBA lifts interest rates.

“In previous cycles when wage growth was strong and it was hiking rates, the RBA dedicated more space to economic growth and inflationary pressure, rather than wages,” they say.

Given the RBA’s recent optimism towards labour market conditions, it will be interesting to see whether it will devote less discussion on that topic tomorrow in favour of more focus on inflation.

With housing market conditions the softest they’ve been in years, there’ll no doubt be some interest if that area gets increased attention.

The RBA will release its SoMP at 11.30am AEDT.

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