Later this afternoon the Reserve Bank of Australia will announce its May interest rate decision, an event that will almost certainly create significant volatility given markets are evenly split on whether or not the bank will cut rates to a fresh record low of 1.75%.
Here’s the state of play.
- Courtesy of last Wednesday’s weak Australian consumer price inflation (CPI) report — which revealed core inflation grew at the slowest annual pace on record in the 12 months to March — expectations for a rate cut in May went from highly unlikely to a strong possibility in an instant.
- Cash rate futures — having put the probability of a 25bps rate cut at just 15% before the CPI report was released — soared in response, implying a greater than 50% chance of a rate cut in May. Currently it is priced at 53%. (Update 12.30pm: the pricing has moved in to 47%.)
- Like markets, economists have also been divided with 10 of 24 in Bloomberg’s latest survey forecasting a rate cut today.
- Looking further ahead, cash rate futures are fully priced for the RBA to deliver at least one rate cut before the year is out. The majority of economists also see rates as likely to be lower than the current level over the same time period.
- Outside of inflation, most other domestic indicators suggest that Australia’s economy is continuing to perform well, further complicating the RBA’s decision.
- Yesterday reads on manufacturing activity, house prices and business confidence and conditions provided little evidence that Australia’s non-mining sectors are in desperate need of further monetary stimulus at present.
- While the rates decision will receive all the initial attention, today will not be just about what the RBA does but also what it says in the accompanying monetary policy statement.
- Of most importance will be the final paragraph in which the bank will offer its policy bias, a directive to markets as to what way interest rates will likely move in the period ahead.
- Last month the RBA 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”, adding “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”.
- This was a clear easing bias, suggesting that rates were more likely to fall than rise moving forward.
- If the RBA were to leave interest rates and the easing bias unchanged this afternoon, it would place a rocket under the Australian dollar as expectations for further rate cuts are priced out by markets.
- Somewhat perversely, if the RBA were to cut rates and adopt a neutral bias — implying steady policy moving forward — this too could see the Australian dollar strengthen in the immediate aftermath of the decision.
- Whether the RBA cuts or not, most expect the bank to keep, or strengthen, its easing bias in the policy statement.
- Outside of the final paragraph, markets will also pay close attention to the language used towards the inflation outlook as well as the Australian dollar. For those looking for a recap as to what the RBA said in April, this link will take you to statement.
- Adding further intrigue, May is a popular month for the RBA to move interest rates given it falls between the ABS’ CPI report and the bank’s quarterly statement on monetary policy.
- In the 20 May meetings held since 1996, rates have been changed on eight separate occasions, including in three of the past four.
Added together, it suggests the decision will be a blockbuster for financial markets.
Whatever the RBA decides to do at 2.30pm AEST, Business Insider will have full coverage as soon as the decision and statement drops.
Business Insider Emails & Alerts
Site highlights each day to your inbox.