Later this afternoon the Reserve Bank of Australia (RBA) will announce its June monetary policy decision, an event that will been closely watched by investors given its decision to cut interest rates to a record low level of 1.75% in May.
While there is a minuscule chance that another rate cut could be delivered at this meeting, most attention today will likely fall on the accompanying monetary policy statement, particularly the final paragraph. Whichever way the board decides to play it, volatility is all but assured.
Here’s the state of play.
- Markets and economists are near-unanimous that interest rates won’t be reduced today, despite the benign outlook for inflation.
- In a survey of 24 economists polled by Bloomberg only one — RBC Capital Markets — is forecasting that the cash rate will be reduced to 1.50%. All others, including Australia’s big four banks, think that rates will remain at 1.75%.
- Financial markets agree with the economic community with cash rate futures putting the probability of another 25 basis point rate being delivered at just 8%.
- History is also on the side of a non-move with the RBA changing rates only twice in June in the past two decades.
- With markets anticipating that the cash rate will be left at 1.75%, all attention will be on the monetary policy statement that will accompany the rate decision.
- In particular, markets will be looking to see whether the board will insert an explicit easing bias in the final paragraph of the statement, something that will signal that rates are likely to move lower in the period ahead.
- In March 2015, having cut rates to a then record-low level of 2.25% in its prior meeting in February, the board stated that “further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target”. This was an explicit easing bias, and one that the bank followed through on by cutting rates to a fresh record-low of 2% in May, just two months later.
- However, following the second rate cut, the RBA stated in its June 2015 policy statement that “information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target”. This was a clear neutral bias, signalling to markets that a prolonged period of steady rates was likely. The bank subsequently held the cash rate at 2% for the next 12 months.
- It’s easy to see why markets will be paying so much attention to the final paragraph in today’s statement, particularly given widespread expectations from economists and markets alike that another rate cut in the second half of the year is a near-certainty.
- Should the RBA deliver a clear neutral bias, or even an implicit easing bias, it will create significant market volatility as markets rush to price out the likelihood of a further near-term rate cut being delivered.
- Should no explicit easing bias be communicated bonds and some higher-yielding stocks (outside of banks) will likely sell off while the Australian dollar will screech higher in response.
- Outside of the final paragraph, markets will closely scrutinise the language the board uses towards outlook for inflation and domestic labour market conditions given its focus on those two areas of late. There’s also likely to be interest on the view offered on the outlook for US interest rates, the Australian dollar and recent developments in the residential property market, particularly in Sydney and Melbourne.
There’s a lot to consider, and there’ll be plenty to discuss post the event.
Whatever happens at 2.30pm AEST, Business Insider will have full coverage as soon the decision drops.