- The RBA is now actively discussing lifting official interest rates.
- Westpac’s Bill Evans says that it’s likely to be years, not months, until the RBA is confident enough to hike.
- Financial markets aren’t fully priced for a 25 basis point increase in the cash rate until mid-2019.
The minutes of the Reserve Bank of Australia’s (RBA) April monetary policy meeting were released today to little fanfare, largely repeating commentary that has been heard umpteen times before in recent months.
However, as usual, there was a talking point.
While it has been heard in several speeches from individual RBA Board Members, including Governor Philip Lowe earlier this month, for the first time in the current cycle the RBA has acknowledged that the next move in official interest rates in Australia is likely to be higher, rather than lower.
“In current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down,” the RBA said in the final paragraph of the minutes discussing considerations for policy settings.
“As progress in lowering unemployment and having inflation return to the midpoint of the target was expected to be only gradual, members also agreed that there was not a strong case for a near-term adjustment in monetary policy.”
While that suggests any rate increase is still some way off, the insertion of the view that the next move is likely to be higher is noteworthy given the RBA has often used policy documents to signal impending changes to interest rates before tightening cycles in the past.
Now, like then, the RBA is signalling to borrowers that interest rates aren’t likely to stay this low forever, at least in its opinion.
The question, and therefore discussion point to come from the minutes, is when official interest rates might start to rise.
Is the “near-term”, as the RBA indicated, within the next few months, or will rates be left at current levels for considerably longer?
While no one truly knows that answer at present, including, in all likelihood, the RBA themselves, Bill Evans, Chief Economist at Westpac, thinks it will be years rather than months before the RBA will feel confident enough to begin normalising rates.
“We do not think that the decision to signal in the minutes that the next move in rates is likely to be up is at all significant,” he said following the release of the minutes.
“While the RBA’s rate outlook is consistent with their forecasts [for inflation and unemployment], the risks to that outlook continue to accumulate.
“Emphasising that progress towards lower unemployment and higher inflation will ‘be only gradual’ appears to be a clear signal that the Bank is undecided at this point and will require quite some time before it can be confident with its view.”
Based on the underlying tone of the April minutes, Evans said that rather than growing in confidence that unemployment will fall to low enough levels to help lift wage and inflationary pressures, uncertainty among the RBA Board appears to be increasing.
“There appears to be a less euphoric assessment of the labour market,” he says, noting that it was a “little more reserved than we have seen in previous minutes”.
“The minutes note that monthly increases in employment have ‘moderated’ [with the] unemployment rate ‘little changed over the previous six months’.
“[It added that ‘measures of underemployment had remained at relatively high levels’ [while recent] indicators suggested there was ‘still some spare capacity in the labour market’.”
Given the commentary all points to slow progress in lifting wage and inflationary pressures in the period ahead, Evans retains the view that rates aren’t going to change for the foreseeable future.
“Westpac continues to expect that rates will be on hold for the remainder of 2018,” he says.
Financial markets agree with that assessment, failing to price in a full 25 basis point increase in the cash rate until mid-2019.