The Reserve Bank of Australia (RBA) will announce its April interest rate decision later today.
Having held the cash rate at 1.5% for 17 consecutive meetings, the longest stretch without a change on record, few, if anyone, expects that trend will change today.
That means all attention will yet again fall on the accompanying monetary policy statement, especially what the bank has to say about increased financial market volatility, a lift in short-term funding costs for lenders and signs that Australian employment growth is slowing following recent data from the ABS.
Here’s the state of play.
- All 17 economists polled by Bloomberg expect no change in interest rates today. Traders — based off current market pricing — are also near certain that rates will be left unchanged.
- That means that all attention will be on the RBA’s accompanying monetary policy statement, and even then few wholesale changes are expected.
- The RBA will almost certainly retain a neutral policy bias in the final paragraph of the statement, indicating that policy is unlikely to change for the foreseeable future.
- In March, it said 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,” adding that “further progress in reducing unemployment and having inflation return to target is expected… although this progress is likely to be gradual”.
- Despite recent weakness in the Australian dollar, it will likely repeat the warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
- Given the proximity to Australia’s March quarter consumer price inflation (CPI) report that will be released later this month, it’s also unlikely to alter its view that “a gradual pick-up in inflation is… expected as the economy strengthens” with “CPI inflation to be a bit above 2% in 2018”.
- The RBA is also likely to repeat that it’s “central forecast is for the Australian economy to grow faster in 2018 than it did in 2017” ahead of the release of updated forecasts in early May.
- The view that Australia’s household sector remains “one continuing source of uncertainty” for economic growth is also likely to remain given recent weakness in retail sales data from the ABS.
- With recent trends much the same from when it met less than a month ago, it’s assessment that Sydney and Melbourne’s housing markets “have slowed” with nationwide measures of housing prices “little changed over the past six months” is also likely to be retained.
- If there are any changes in the April statement, they’ll likely reflect recent developments in financial markets and trade frictions between the United States and China.
- On financial markets, the RBA said last month that “volatility has increased from the very low levels of last year” as “a number of central banks have withdrawn some monetary stimulus”. It added that “financial conditions remain expansionary, with credit spreads narrow”, a view that may be challenged today following a noticeable increase in short-term funding costs for lenders during March.
- On trade, the RBA also noted that economic “growth picked up in the Asian economies in 2017, partly supported by increased international trade”. Given recent trade frictions between the US and China, the bank may take this opportunity to discuss the risks posed to the Australian economy.
- Domestically, the RBA may tweak its commentary on the outlook for Australia’s terms of trade given recent weakness in iron ore and cola prices.In March, it said Australia’s “terms of trade are expected to decline over the next few years, but remain at a relatively high level”.
- Given a slowdown in Australian employment growth since the start of a year, contributing to a lift in Australia’s unemployment rate, the bank may also make some small changes to its commentary on the labour market.
- It previously described forward-looking indicators as continuing to “point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected”.
- If this commentary is changed, there’s a small risk it may also tweak its view that stronger economic growth “should see some lift in wage growth over time”. Such an outcome is highly unlikely, but it will have ramifications on the outlook for interest rates should it arrive.