While on the surface the Reserve Bank of Australia’s (RBA) November monetary policy statement suggests that interest rates will be left unchanged for some time yet, continuing the pattern seen since September last year, the underlying tone of the statement continues to suggest that it will lift rates twice in 2018.
According to ANZ’s RBA “Bias Index”, while slightly less hawkish than statements released earlier this year, the commentary from the RBA continues to point to the likelihood that the bank will begin to normalise policy settings next year.
Here’s the latest reading following the release of the November statement.
The yellow line is past changes to the RBA cash rate over a rolling six-month period, overlaid against the Bias Index. The bold blue line is the three-month moving average of the index, and despite a slightly less hawkish statement in November, it still points to a cumulative 50 basis points of rate hikes next year.
The Bias Index uses an algorithm to scan each RBA statement for clues as to whether the RBA is hawkish or dovish in its language. While it doesn’t have a perfect relationship to movements in the cash rate, it is a useful lead indicator on what the bank may do in the future.
“[The] indicator continues to point to two rate hikes next year, though it has eased somewhat,” say Felicity Emmett and Giulia Lavinia Specchia, economists at ANZ.
“We think in part because the shift in market pricing has shifted how the market views particular words.”
Financial markets have scaled back their expectations for RBA rate hikes in recent months following soft readings on retail sales and inflation in Australia. Only a couple of months ago close to two 25 basis point rate hikes were fully priced for 2018. Now a 25 basis point hike isn’t fully priced until early 2019.
While markets think the RBA will likely be on hold throughout 2018, ANZ, like its Bias Index, is still forecasting that rates will increase twice next year.
“We continue to expect the Bank to raise the cash rate by 25 basis points in May next year, and then again in the second half of 2018,” say Emmett and Specchia.
“While the recent weakness in retail sales and inflation suggests that tighter policy is some way off, our central view is that by the middle of next year the growth outlook will be strong enough to drive a fall in the unemployment rate and an eventual pick-up in wage and price inflation.
“The Bank’s increased focus on financial stability suggests to us that it will move rates off the current historic low levels a little earlier than it would have in previous cycles, as long as it feels confident that inflation is heading in the right direction.”
In the final paragraph of its November statement, the RBA said that “holding the stance of monetary policy unchanged… would be consistent with sustainable growth in the economy and achieving the inflation target over time.”