The Reserve Bank of Australia (RBA) will deliver its May interest rate decision at 2:30pm AEST.
With the consensus market view that the cash rate will remain at 1.5%, attention on the accompanying monetary policy statement will be focused on whether the bank flags any additional concerns on housing and the labour market.
Here’s the state of play:
- Rates are almost certain to remain on hold today. All 26 economists polled by Bloomberg expect it will remain steady at 1.5%.
- Cash rate futures are pricing in a 98% probability that there’ll be no move in either direction today, with a 2% chance that the RBA reduces rates by 25 basis points.
- Given that expectation, all attention will understandably fall on the bank’s monetary policy statement.
- The RBA will almost certainly offer a neutral bias on the outlook for interest rates in the final paragraph of the statement, an outcome that will further cement expectations that they’ll be on hold for the foreseeable future.
- The bank changed the tone of its comments on housing in the April announcement, stating that “growth in household borrowing, largely to purchase housing, continues to outpace growth in household income,” while “growth in rents is the slowest for two decades”.
- While the changes made it clear that the RBA is concerned about speculation in the housing market, it also said that recent measures to reduce systemic risks — out-of-cycle rate increases on investor loans and a reduction in interest-only loans — would have the required effect.
- “By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness,” the bank said in April.
- Markets will be paying extra attention to any statements on housing, as many analysts believe ongoing strength in Sydney and Melbourne prices is preventing the bank from lowering rates to boost activity in other parts of the economy.
- The other key area of focus will be on the bank’s comments towards the labour market. The RBA acknowledged that the labour market had “softened” in its April comments, after a weak February jobs report. “In particular, the unemployment rate has moved a little higher and employment growth is modest,” it said. “The various forward-looking indicators still point to continued growth in employment over the period ahead.”
- Those statements were made before the release of the March jobs report when overall employment unexpectedly surged ahead.
- That may lead to a slight change in the language on the labour market. However, unemployment is still relatively high at 5.9%, and historically high underemployment plus low wage growth continue to weigh on the inflation outlook.
- On the inflation front, the RBA continued to cite that low wage growth in its April comments. “The rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued,” it said.
- Last week’s inflation figures were broadly in line with the RBA’s predictions, with headline inflation sneaking into the bank’s 2-3% goal range while underlying inflation was at 1.8%.
- Although headline inflation rose, the bank may discuss the underlying weakness in retail spending (down 1.2%), given the importance of domestic consumption in Australia’s GDP outlook.
- On the Australian dollar, the RBA’s view has been that an appreciating exchange rate would “complicate” the economy’s transition away from the mining boom. In view of that, the bank may discuss the recent falls in the iron ore price, which accelerated in April and saw iron ore fall more than 30% from its late-February high. However, the Australian dollar remains largely unchanged in trade-weighted terms from when the board last met.
Business Insider will have all of the details as soon as the data is released.
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