The Reserve Bank of Australia’s (RBA) February interest rate decision will be released later today.
While there’s little chance the bank will move interest rates at the conclusion of this meeting, there’s still likely to be plenty of interest on the February monetary policy statement.
First, this is the first time we’ve heard from the RBA board in two months. During that period, we’ve received a raft of important data releases, including Australia’s weak December quarter consumer price inflation report at the end of January.
Second, ahead of this Friday’s quarterly RBA Statement on Monetary Policy (SoMP), it will likely contain fresh clues as to what changes — if any — the bank will make to its forecasts for inflation, the unemployment rate and GDP growth.
So while there is little chance that rates will move today, there’s a good chance the RBA will provide some clues as to whether there’s likely to be moves in the foreseeable future.
Are the markets right in pricing in the likelihood of a 25 basis point rate increase by November, or have they jumped the gun in betting on a rate rise this year?
We may be about to find out.
Here’s the state of play:
- If interest rates do change today, it will surprise almost everyone. All 23 economists polled by Bloomberg expect the cash rate will be left at 1.5%. Financial markets are equally unenthusiastic about a potential move in either direction, ascribing a 100% chance that rates will be left unchanged.
- Given those not-so-lofty expectations, it means all interest will fall on the accompanying monetary policy statement, particularly what the bank has to say about the Australian dollar, along with the outlook for inflation, wage pressures and the broader Australian economy.
- Of all the areas mentioned above, there’s likely to be plenty of scrutiny on the bank’s assessment on the recent strength in the Australian dollar, including the implications for inflation and economic growth.
- When the RBA last met on December 5, it said: “the Australian dollar remains within the range that it has been in over the past two years”, adding 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”.
- Since that date, the AUD has rallied by 3.6% against the US dollar, and by a smaller 0.6% in trade-weighted terms.
- While the Aussie has weakened in recent days, the bank could use this opportunity to express greater concern as to what this could mean for economic growth and inflation should it continue to strengthen.
- Along with the Australian dollar, there’s likely to be more discussion on inflation given Australia’s December quarter CPI report was released in late January.
- In December, the bank said: “inflation remains low, with both CPI and underlying inflation running a little below 2%”, an outcome that was again seen in the Q4 CPI report.
- While soft, annual growth in underlying inflation, at 1.9%, was above the RBA’s year-end forecast for 1.75%. That suggests it will retain the view that inflation will begin to “pick up gradually as the economy strengthens”.
- Ahead of Friday’s quarterly SoMP, the RBA will likely provide some clues as to whether or not its GDP growth forecasts have been changed.
- When it last met in December, it said: “the central forecast is for GDP growth to average around 3% over the next few years”. That’s likely to remain much the same given recent economic data.
- If there is to be a change in the bank’s commentary on the Australian economy, it could come from its assessment on household spending.
- “One continuing source of uncertainty is the outlook for household consumption,” the bank said in December, adding that “household incomes are growing slowly and debt levels are high”.
- While little has changed in relation to the latter, recent Australian retail sales reports have come in well above market expectations. Consumer confidence, whether measured by ANZ or Westpac, has also risen to the highest levels seen in more than four years.
- On balance, that suggests the concern towards households may ease a touch in today’s statement.
- The bank’s commentary on the labour market is also likely to be much the same given ongoing strength in official and private sector surveys.
- Employment growth remains “strong” and accompanied by a “rise in labour force participation”. Various forward-looking indicators are also continuing to point to “solid growth in employment over the period ahead”. It will likely repeat that “wage growth remains low” and the view that “stronger conditions in the labour market should see some lift in wage growth over time”.
- There’s also likely to be few changes in the bank’s view on the housing market given many of the same trends seen in late 2017 have continued in early 2018. Price growth is still softening, led by the once high-flying Sydney property market.
- On the international economy, there’s likely to be a few changes reflecting the recent lift in global bond yields and financial market volatility. Other than that, the February statement will likely paint a rosy picture on the state of the global economy.
- Putting it all together, it’s highly likely that the RBA will keep the final paragraph of the statement unchanged, providing a neutral stance on the outlook for interest rates.
- To recap, in December it said: “the low level of interest rates is continuing to support the Australian economy”, adding that “taking account of the available information…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.”
- Any change to this outlook would be seen as a major surprise, and would almost certainly lead to speculation that the RBA may be prepping markets for an earlier-than-expected rate increase.
The February monetary policy statement, including the interest rate decision, will be released at 2.30pm AEDT.
Business Insider will have all of the details as soon as it hits the screens.