The Reserve Bank of Australia (RBA) will announce its July interest rate decision later today.
Given the cash rate will almost certainly remain at 1.5%, attention will yet again turn to the accompanying monetary policy statement. While the RBA usually makes few major changes, saving that instead for the meeting minutes released two weeks after the policy decision, markets will be looking out for any tweaks that could indicate a change in mindset from the board.
This month, the focus will likely be on financial market conditions along with the outlook for the Australian economy, employment and housing market conditions.
Here’s the state of play.
- The last time the RBA moved official interest rates was August 2016 — a cut of 25 basis points in the cash rate to 1.5%.
- At 22 months, the current stretch of policy stability is the longest on record.
- Financial markets aren’t fully priced for a 25 basis point increase in the cash rate until late 2019.
- The vast majority of economists share a similar view, forecasting that rates will remain unchanged throughout this year. An increasing number don’t think there’ll be a move until 2020 at the earliest.
- As such, all 23 economists polled by Bloomberg expect the cash rate will remain at 1.5% today. Cash rates futures ascribe a 0% chance of a movement in either direction.
- In today’s statement, most interest will be on the bank’s commentary on Australia’s labour and housing markets, as well recent developments in financial markets, including funding costs for banks.
- On Australia’s housing market, the bank may strike a more dovish tone compared to the commentary offered in June. Be it prices, clearance rates, new home sales, housing credit and mortgage lending, all data points have been weak.
- In June, the bank said “housing markets in Sydney and Melbourne have slowed,” adding “nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas”.
- It also admitted that while “there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline”.
- We now know the bank was referring to average mortgage rates over the past year. Some smaller lenders have recently delivered out-of-cycle mortgage rate increases, hinting that this view may change in today’s statement.
- Linked to higher mortgage rates, keep an eye out for any change in language towards the increase in Australian wholesale funding costs.
- Previously, it said “higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia”.
- In recent weeks, short-term market interest rates have fallen in the United States but have continued to increase in Australia, adding to margin pressures for lenders.
- For the broader Australian economy, the bank will likely retain the same half-glass-full assessment despite some recent weakening in business confidence measures.
- The view that household consumption is “one continuing source of uncertainty” will likely remain despite a modest lift in retail sales in April. Alternate spending measures have weakened since the board last met, particularly in New South Wales and Victoria where home prices are currently falling.
- Despite most leading indicators, outside of job vacancies, softening over the past month, the RBA’s view that they “continue to point to solid growth in employment in the period ahead, with a gradual reduction in the unemployment rate expected”, is likely to remain the same.
- Despite a decline in Australia’s unemployment rate in May, the view that unemployment has been “little changed at around 5.5% for much of the past year” is likely to be retained.
- Given recent trends and a lack of new data, its commentary on wage growth and inflation will probably remain unchanged.
- The RBA will likely acknowledge the recent decline in the level of the Australian dollar against both the greenback and in trade-weighted terms. However, the warning that a higher exchange rate “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast” should remain. If it’s removed, it will result in a substantial move higher in the Aussie, especially with building short positions held by traders.
- Also keep an eye out for any changes in the commentary relating to trade tensions between the United States and China, as well as flow-on effects to financial markets.
- In June, it noted market “concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies”.
- In what should be the easiest decision at the meeting, the bank will almost certainly retain the same wording as June in the final paragraph of the statement, indicating that official interest rates will remain unchanged for the foreseeable future.
The policy statement, including the interest rate decision, will be released at 2.30pm AEST.
Business Insider will have all of the details as soon as it hits the screens.
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