RBA Preview: what to expect from this week’s RBA meeting

The market is expecting the Reserve Bank of Australia (RBA) to cut interest rates at this meeting to a new low of 0.75%. According to the interest rate futures, a 25-basis-point cut from the RBA is considered an 80% chance.

When is the Reserve Bank of Australia (RBA) meeting?

This month’s RBA meeting will occur on Tuesday 1 October at 2.30pm (AEST).

The economic data that matters:

GDP (YoY)

Unemployment Rate

Wages Growth (YoY)

CPI (YoY)

Retail Sales (YoY)

1.4%

5.3%

2.3%

1.6%

2.4%

What are the key themes to watch out of this RBA meeting?

Is the economy going through a ‘gentle turning point’?

In his latest address to the market, RBA Governor Philip Lowe stated that the Australian economy has come to a ‘gentle turning point’. Acknowledging growth won’t be as strong as it’s been in the past, Governor Low expounded his belief that ‘lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, ongoing spending on infrastructure, the stabilisation of the housing markets in some cities and a brighter outlook for the resources sector’ will keep the Australian economy growing in ‘the near term’. Investors will be looking for Governor Lowe to expand on this idea at this meeting, and whether that means a lower likelihood of more rate cuts to come from the RBA.

How are global ‘downside risks’ impacting the local economy?

The primary risk to the RBA’s prognosis for the Australian economy is global ‘downside risks’. As articulated by RBA Governor Philip Lowe recently, ‘Trade and technology disputes between the United States and China is the most significant risk’ to the economy. But it’s not the only one. Others include: ‘The Brexit issue, developments in the Middle East, the problems in Hong Kong and the tensions between Japan and South Korea’. The uncertainty caused by these risks is weighing on global business conditions and investment decisions, which could, in time, weigh on global growth. The Australian economy would not be exempt from this dynamic, with markets keen, out of this RBA meeting, to understand whether the RBA considers global risks to have grown since it last met.

Could a property market recovery complicate the RBA’s job?

A burgeoning risk to RBA policy, so far downplayed by the central bank, is what impact a property market recovery in Australia’s Eastern states may have on its decision making. It is still too soon to call a turnaround, but recent data suggests that some heat is coming back into the Australian housing market. Of some concern, too, is that this appears to be a credit-fuelled recovery, raising the spectre of rising private debt levels at a time when debt is already high, and growth is soft. If asset prices were to become elevated again, this could constrain the RBA from cutting rates further. Judging the probabilities of this risk will be one theme out of this month’s RBA meeting.

What is the market expecting at this RBA meeting?

Despite what seems like a near certain cut from the RBA, views amongst the commentariat are slightly more mixed. The majority opinion is that the RBA will lower rates again. However, there remains a minority view that a cut at this meeting will still be too soon, and that the RBA will ‘wait-and-see’ how its June and July cuts impact the economy before cutting again.

How could the RBA meeting impact the financial markets?

Interest rates

Interest rate markets could swing most considerably off-the-back of this RBA meeting. At the most extreme, if the contrarian view prevails that the RBA keeps rates on hold this month, a rapid repricing of the 19 basis points currently in the interest rate curve would occur, forcing short-term rates and yields higher across the curve. In the more likely event the RBA cuts, then the interest will be positioning for when (and probably not if) the RBA cuts again. As it presently stands, the market is assuming that the RBA will certainly cut once before the end of 2019, and then once again by the second quarter of 2020.

Australian Dollar

As a ‘live meeting’, the AUD/USD is expected to trade in a volatile way around this RBA meeting. This is because whether the RBA cut or keep rates on hold, the market will either have to price-in an extra 6 basis points of cuts into interest rates markets, or remove the 19 points of cuts that are already baked in. Naturally, the biggest move for the AUD will come if the latter were to occur. That might send the Australian Dollar back into the 68 cents level in quick fashion. Alternatively, a cut would see the currency plunge further into the 67-handle.

ASX200

Another rate cut would be undoubtedly good for the Australian stock markets – especially if the RBA maintains its ‘glass-half-full’ attitude to the domestic economy. Lower interest rates have bolstered valuations across the Australia 200 since it became clear in early 2019 that the RBA would be needing to cut interest rates this year. Consumer stocks have been amongst the biggest beneficiaries of this, as markets assume lower rates ought to feed through to greater consumer spending in the future. High-multiple stocks in the I.T. and healthcare sector have also benefited greatly, as lower risk-free rates draw investors into taking on greater risk.


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