The Reserve Bank of Australia (RBA) hasn’t increased interest rates since late 2010, but that looks set to change.
Most in financial markets think the next move will be higher, the only question is when. Some think it will be as soon as May while others think it will be years. The majority think it will be late this year or in early 2019.
However, if the language in the RBA’s February monetary policy statement is anything to go by, a rate rise could come earlier than many expect.
At least according to this analysis from ANZ Bank.
It’s the bank’s RBA Bias Indicator, a tool that analyses the wording and phrasing used by the RBA to detect shifts in what the bank may do next with interest rates.
The yellow line is the change in the RBA cash rate over a rolling six-month period. The dark blue line is the three-month moving average of ANZ’s indicator, advanced six months to demonstrate the relationship between the two.
In February, the language used by the RBA was perceived to have been more hawkish, according to the indicator, pointing to the likelihood that rates will begin to increase in the near future.
While the indicator does not have a perfect track record in capturing changes in the cash rate, it has been a pretty good guide as the chart shows.
And few will disagree that the RBA’s February monetary policy statement sounded slightly more optimistic with the bank noting that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
For an inflation-targeting central bank that’s important, suggesting that the next move in rates will be higher.
Much will depend on just how “gradual” that expected lift in inflationary pressures will be, or how confident the RBA is that it will occur.
ANZ thinks the bank will be confident enough to begin lifting interest rates in May, although this is preconditioned on an acceleration in wage pressures.
“The Q4 wage data due on 21 February are shaping up as the key domestic release for the first half of 2018,” says David Plank, Head of Australian Economics at ANZ.
“If these data suggest that the apparent softness of the Q3 wage print was misleading then we think the RBA will still be on track to tighten in 2018.
“However, if the Q4 wage data confirms that underlying wage growth slowed in the second half of 2017 we think it will be difficult for the RBA to be confident enough in the outlook to tighten for some time.”
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