It’s the first Tuesday of the month which means it’s also the day the Reserve Bank of Australia Board sits down to deliberate on the outlook for the economy and interest rates.
This month’s meeting is likely to be an interesting one, with clear signs that monetary policy is working with even lagging indicators like ANZ Job Ads, released yesterday, now starting to look healthy once again.
This along with rising demand for home loans, still strong building approvals and inflation near the top of the RBA’s 2-3% band suggests the time for 2.5% interest rates is nearing.
Yesterday after the TD monthly inflation index rose 0.4%, Annette Beacher, TD Securities’ head of Asia Pacific Research, reiterated her call for an increase in rates of 50 basis points later this year. Paul Bloxham, HSBC chief economist in Australia told Business Insider yesterday that he also thinks rates could begin to move higher later this year and that the current market pricing for no move until 2015 is too sanguine.
But even though the market, economists and forecasters are leaning toward the next move higher in interest rates, it would be a shock if the RBA moved rates today.
So the focus is going to be on the governor’s statement and a few key phrases relating to the outlook for inflation, the labour market and the course of interest rates in the period ahead. In particular, the market will be looking to see if there is any change to the key phrase the RBA has been using lately that “the most prudent course is likely to be a period of stability in interest rates.”
Likewise on Currency markets, Forex traders will be hanging on any comments about the “level” of the Aussie dollar. Over the past six months, the RBA has struggled to get the language right on the Aussie, clearly spooked by the surprise that was the high December quarter 2013 CPI release.
Westpac chief economist Bill Evans noted earlier this week:
From my perspective, the most interesting aspect of the Governor’s Statement which will be released following the Board meeting is whether he will revert to describing the Australian dollar as “uncomfortably high”. Recall that in December, when the AUD was at USD 91, the AUD was described as “uncomfortably high”. Today it stands around USD 92.75, so it seems reasonable to expect a change in rhetoric.
Of course, the bank moved away from the “uncomfortably high” language in the wake of the surprise 0.9% print for underlying inflation for the December quarter. That result was clearly attributed to the fall in the AUD through 2013 with “imported inflation” explaining most of the increase. The dropping of the easing bias and the “uncomfortably high” language subsequently coincided with the AUD lifting back to USD 0.93.
So even though the RBA isn’t expected to move rates today, once again the announcement is unlikely to be a non-event.
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