The Reserve Bank of Australia (RBA) will hold its July monetary policy meeting tomorrow with no major forecasters, let alone anyone in financial markets, expecting the cash rate to move from its present 1.5%.
However, while that outcome is, quite rightfully, seen as a near-certainty, the question everyone wants answered is whether the RBA will follow the lead of the European Central Bank, Bank of England and Bank of Canada in recent weeks and turn hawkish in its accompanying monetary policy statement, paving the way for a potential increase in interest rates in the months ahead.
According to Prashant Newnaha, interest rate strategist at TD Securities in Singapore, there’s a small-yet-still-significant chance that the RBA may go down that path, assigning a 15% probability of a hawkish monetary policy statement being released tomorrow.
While not insignificant, and well above the probability assigned to a dovish policy statement being released by governor Philip Lowe, Newnaha expects that the RBA will retain a neutral tone in July, continuing the pattern seen for the best part of a year.
“The RBA has long held an upbeat view on the global economic outlook,” he says.
“While the bank is likely to reaffirm this and point to the run of Aussie employment data as supportive for the growth outlook, the RBA is likely to fall short of striking similar hawkish tones as the BoC, BoE and ECB given elevated levels of spare capacity, sub trend growth — even if temporary — and prospects that a firmer AUD could disrupt the economic transition.”
This flow chart from TD Securities shows not only the probability or a rate move tomorrow in Newnaha’s opinion, but also the possibility of either a neutral, hawkish or dovish statement being delivered.
It also details the expected magnitude of the market reaction no matter what the outcome.
While TD isn’t expecting much from the RBA tomorrow, it expects that will change in the months ahead, forecasting that the bank will increase official interest rates in May next year.
Although a far more hawkish outcome that what many currently expect, as Newnaha points out, it’s an idea that financial markets are slowly moving towards, too.
“The shift in RBA pricing has been swift,” he says, adding that shifting rhetoric from other major central banks have played a part in this repricing.
“The day before the June RBA meeting, the market was placing a 20% chance of a November 2017 RBA cut. This morning the market is placing a 5% chance of a 25 basis point hike.”
He says that rate hike expectations have shifted even more for early next year, noting that markets are now pricing in a 25% chance of a rate hike in February, a stark turnaround from only a week ago when they were still factoring in a small possibility of a cut.