The RBA's tone 'continues to point to two rate hikes next year'

Catherine, Duchess of Cambridge laughs as she wears a big foam hand. Photo:Matt Dunham – WPA Pool/ Getty Images.

The Reserve Bank of Australia’s (RBA) October interest rate meeting is unlikely to be remembered for creating excitement across financial markets.

It kept the cash rate unchanged at 1.5% for a fourteenth consecutive month and made minimal changes to the accompanying monetary policy statement, upping its assessment on the labour market and non-mining investment while continuing to caution on the Australian dollar and household sector.

All very much expected, and pretty dull to be honest.

However, while it won’t be remembered for long, it may well be laying the platform for more exciting events in the future, including the possibility that the RBA may lift interest rates for the first time since late 2010.

Indeed, as seen in ANZ’s RBA Bias Index shown below, even with minimal changes to the October statement, the language used was still marginally more hawkish than that used in September, hinting that the RBA is slowly moving towards increasing interest rates.

Source: ANZ

The index takes key phrases used by the RBA in its post-meeting statements to determine whether its moving towards a change in interest rates. ANZ says that it signals the likely change in the cash rate over the coming six months.

So it’s a lead indicator on what the RBA may do next.

And based on what it said in October, ANZ remains confident that the RBA will start to normalise policy by the middle of next year.

“We expect that by mid-next year, the RBA will feel comfortable reversing the rate cuts implemented in 2016,” it says.

“Our confidence in looking for rate hikes in 2018 is boosted by the hawkish shift in the RBA’s language over the past few months, as indicated by our RBA Bias Index, which continues to point to two RBA rate hikes next year.”

While the RBA appears to be incrementally moving towards a rate hike next year, several major data releases in the months ahead could well shift the dial on the outlook for monetary policy settings.

Beginning from mid-October, markets will receive September’s jobs report, consumer price inflation and wage data for the September quarter, along with private business capital expenditure figure, also for the September quarter.

Along with the household sector, these were the main areas of focus in the RBA’s October statement, and will likely determine whether or not a near-term rate hike will be delivered.

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