Later this afternoon the Reserve Bank of Australia (RBA) will announce its July monetary policy decision. While almost everyone believes that the cash rate will be left at 1.75%, given expectations that rates will be cut again, perhaps as soon as August, markets will be paying close attention to the wording of the accompanying monetary policy statement, especially the final paragraph.
Here’s the state of play.
- Not one economist polled by Bloomberg expects that rates will be reduced today. All 25 forecast that the cash rate will remain at 1.75%.
- Cash rate futures mirror that sentiment, attaching a measly 5% probability that the cash rate will be reduced by 25 basis points to 1.50%.
- History is also on the side of those favouring a non-move from the RBA. Only once, in 1997, have rates been moved at the July policy meeting in the past two decades.
- With markets all but assured that the cash rate will remain unchanged, all attention will be on the wording of the accompanying monetary policy statement, particularly the final paragraph in which the bank offers its bias on interest rates.
- The bias, a forward indicator on what the bank is likely to do with interest rates ahead, is particularly relevant on this occasion given 24 of 25 economists polled by Bloomberg believe that the RBA will cut rates to 1.50% in August.
- At its previous meeting in June, the bank stated that “taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”
- This was a clear neutral bias, providing no indication on whether interest rates were likely to be reduced further in the period ahead.
- Some argue that the bank’s commentary on the outlook for inflation is an implicit easing bias in itself, indicating that it is likely to reduce rates without actually stating it.
- Given recent uncertainty generated by the UK Brexit vote, along with Australia’s federal election which could deliver a hung parliament, some believe that the RBA may deliver an explicit easing bias in its July policy statement.
- In its April policy statement — one month before rates were cut in May — the final paragraph noted that “new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.”
- The reference to inflation was particularly relevant given it came before the release of Australia’s Q1 CPI report, something that was weak enough to prompt a rate cut less than one week later.
- Similar wording may arrive today given the board will receive updated information on inflation when the Q2 CPI report is released in late July.
- Outside of inflation, keep an eye out for any reference relating to residential housing, particularly the Sydney and Melbourne markets, along with any change in rhetoric towards the level of the Australian dollar. This link will take you to the RBA’s June policy statement for reference.
The rates decision and accompanying monetary policy statement will be released at 2.30pm AEST.
Business Insider will have full coverage as soon as the decision drops.