The Reserve Bank of Australia (RBA) will announce its May interest rate decision later today.
As has been the case for nearly two years, few, if anyone, expects the RBA will move the cash rate in either direction at the conclusion of its meeting.
However, given this meeting follows Australia’s March quarter consumer price inflation (CPI) report last week, and comes just before the release of updated economic forecasts from the RBA on Friday, there’s likely to be plenty of attention for today’s monetary policy statement.
In particular, the RBA will likely flag any potential changes to its forecasts for inflation, unemployment and GDP growth, providing an indication as to what it may do with interest rates in the period ahead.
That alone means there’ll still be plenty of interest, and the potential for some short-term volatility in financial markets, in the immediate aftermath of today’s decision.
Here’s the state of play.
- The cash rate has remained at 1.5% for 18 consecutive meetings, the longest stretch of policy inertia on record.
- The last time the RBA moved the cash rate was in August 2016 — a decrease of 25 basis points. It hasn’t lifted interest rates since late 2010.
- Economists and financial markets strongly agree that interest rates won’t move today.
- Of the 23 economists polled by Bloomberg, all expect the cash rate will remain at 1.5%. Financial markets are equally convinced that rates will be left unchanged.
- That means all attention will be on the accompanying money policy statement, especially what the RBA has to say on the outlook for Australian economic growth, labour market conditions and inflation ahead of its quarterly Statement on Monetary Policy (SoMP) released on Friday.
- When it last met in April, the bank said Australian economic growth would be “faster” than 2017 when it grew by 2.4%. Before it released its prior GDP forecasts in February, it stated that growth would “average a bit above 3% over the next couple of years”.
- To Bill Evans, chief economist at Westpac, the toning down of the bank’s language suggests it will lower its 2018 forecasts from 3.25% to 3% in Friday’s SoMP.
- Elsewhere, its commentary on the economy will likely be much the same. Business conditions are still “positive” and non-mining business investment, given a lack of new information, is still “increasing”. The outlook for household consumption also remains “uncertain” with household incomes “growing slowly” and debt levels “high”.
- It may also strike a slightly more cautious tone when it comes to current labour market conditions.
- In April, the bank said employment grew “strongly over the past year” with that “accompanied by a significant rise in labour force participation”. It added that the unemployment rate had “declined over the past year but had been steady at around 5.5% over the past six months”. It also noted that “a further gradual reduction in the unemployment rate” was expected.
- With employment growth slowing at a time when labour force participation remains elevated, the RBA may flag a downgrade to its unemployment forecasts in the May SoMP. In its forecasts offered in February, it saw unemployment falling to 5.25% by the end of the June quarter, below the 5.5% level it sits today.
- Its view that various forward-looking indicators “continue to point to solid growth in employment in the period ahead” will likely remain the same, as will the assessment that stronger economic conditions “should see some lift in wages growth over time”.
- While it may downgrade its forecasts for unemployment and GDP growth, it could upgrade its view on underlying inflation given a sharper-than-expected acceleration in the 12 months to March this year.
- In April, it said both CPI and underlying inflation were “running a little below 2%” with a “gradual pick-up in inflation… expected as the economy strengthens”.
- In the March quarter, underlying inflation rose by 2% over the year, some 25 basis points above the RBA’s 1.75% forecast for the end of the June quarter.
- Outside of those areas, the RBA is unlikely to make wholesale changes to the remainder of the May statement.
- Despite recent weakness, its view that a higher Australian dollar “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast” is likely to remain in place.
- Its commentary on the housing market, on balance, could be slightly softer given ongoing price falls in Sydney and Melbourne. In April, it said the Sydney and Melbourne markets had “slowed” with nationwide measures of prices “little changed over the past six months”.
- Recent data suggests prices have now fallen in most Australian cities since the beginning of the year, led by Sydney and Melbourne.
- Its views on the international economy and financial markets are likely to be much the same as those communicated in April.
- As such, it will likely retain a neutral bias on the outlook for interest rates in the final paragraph of the statement.
- Previously, it stated that holding rates steady “would be consistent with sustainable growth in the economy and achieving the inflation target over time”, adding that “the low level of interest rates is continuing to support the Australian economy”.
- It also noted that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
- Even with a slight acceleration in underlying inflation back to the bottom of its 2 to 3% annual target, it would come as a major surprise if the bank were to drop the reference to a “gradual” improvement today.
The RBA 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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