Though some would disagree, it looks like the next move in Australian interest rates will be up.
Indeed, when fronting parliamentarians in August, Reserve Bank of Australia (RBA) governor Philip Lowe said that it would be reasonable to assume that the “next rate move will be up rather than down”.
Presuming the governor and an increasing number of analysts are right, the only real question is when will the RBA pull the trigger on the first increase in the cash rate since late 2010.
No one knows that answer yet, not even Lowe in all likelihood, but it’s unlikely that it will come out of the blue.
The RBA, like other major central banks, have become all too aware that markets don’t like surprises, so it tends to drop clues as to when a change in policy is coming.
So far under Lowe’s tenure, he’s not had to do much on the monetary policy front, leaving the cash rate unchanged at 1.5%.
While that creates some uncertainty as to how Lowe may signal that a rate change is coming, Paul Dales, chief Australia and New Zealand economist at the Capital Economics, says that Lowe may borrow from his predecessor, Glenn Stevens’, playbook by tweaking the language in the final paragraph of its monthly policy statement.
“The RBA could draw on the language it used during the rate hiking cycle from October 2009 to May 2010,” he says.
“In the month before the first hike in that cycle, the RBA signalled it was coming by adding the phrase ‘for the time being’ to the policy statement released in September 2009.
“The RBA could do something similar this time round by altering the current language to say ‘the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent for the time being with sustainable growth in the economy and achieving the inflation target over time’.”
In the final paragraph of its September policy statement, the RBA said that “taking account of the available information, the Board 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.”
To Dales, while Lowe may not maintain the same precedent as Stevens, he says that Lowe may stick to the previous practice by signalling one month in advance that the RBA plans to raise interest rates.
Paul Bloxham, chief Australia and New Zealand economist at HSBC, agrees that rather than providing a specific time frame to markets, Lowe will likely use commentary on the economy to signal that a change in rates is coming.
“The RBA does not give explicit forward guidance,” he says. “Instead it shifts the tone of its discussion about the outlook for growth and inflation and leaves it to the market to determine what it might mean for the cash rate setting.”
All eyes on upcoming RBA commentary then, starting with October’s monetary policy statement released next Tuesday.