RBA Preview: what to expect from this week’s RBA meeting
There is little chance the Reserve Bank of Australia (RBA) will change interest rate settings at this meeting.
When is the RBA meeting?
This month’s RBA meeting will occur on Tuesday 5 November at 2.30pm (AEDT).
The economic data that matters:
Wages Growth (YoY)
Retail Sales (YoY)
What are the key themes to watch out of this RBA meeting?
Interest rate cuts: should the market not count on it?
Expectations of a rate cut at this meeting have fallen precipitously in the past month. After the RBA’s October meeting, a cut at this meeting was considered a fifty-fifty proposition. But the tide turned following a speech delivered by RBA Governor Philip Lowe last month, within which the Governor suggested the market shouldn’t 'count on' further rate cuts to come from the RBA. Since then, the market has greatly tempered its expectation for interest rate cuts in the future. This month’s meeting, therefore, rather being about policy action, will be about qualifying what Governor Lowe meant by his commentary, and what that means about the chances for future rate cuts.
What’s this 'gentle turning point' going to look like?
The RBA’s recent messaging has focused on the key phrase 'gentle turning point'. That is: the RBA believes that, after several periods of underwhelming economic activity, the combination of rate cuts, tax cuts, and a turnaround in the Australian property market should see the economy’s slowdown bottom out. According to the RBA, it sees GDP returning to trend levels over the next few years, and that will lead to a fresh pick-up in employment, and an eventual – albeit slow – achievement of its inflation target. While markets understand the need for optimism from the central bank, this meeting will be used by the market to judge the credibility of the RBA’s view.
Reading between the lines: what’s the chance of QE?
It’s still largely academic, but for many, the RBA’s policymaking is being analysed in the context of how much closer Australia is coming to its own quantitative easing regime. That’s because, with the RBA expected to cut rates to new record lows in the next 12 months, interest rates are approaching their 'effective lower bound', where rate cuts no longer have a stimulatory effect on the economy. That means that in order to reach its mandated economic objectives, the RBA will, at some stage, need to employ 'unconventional' policy measures. Though not a pressing risk, markets will continue to follow RBA guidance to judge if and when these policies may arrive.
What is the market expecting at this RBA meeting?
There’s very little chance the RBA will change interest rate settings at this meeting. As it currently stands, the interest rate futures curve is implying a less than 5% chance of another cut from the central bank. Instead, it’s going to be one of those meetings primarily pre-occupied with gauging the RBA’s forward guidance, and inferring when the next cut might occur. Right now, there’s less than a one-in-four chance of a cut in December, while its only a fifty-fifty chance another will come next year at all. Hence, market participants will be perusing the RBA’s statement to test these expectations.
How could the RBA meeting impact the financial markets?
The Australian Dollar has exhibited signs of strength recently, as market participants lower expectations for future interest rate cuts, and optimism grows about progress in the US-China trade war. The RBA is in a precarious situation when it comes to the A-Dollar. The central bank has been explicit in stating its discomfort with a stronger currency, and that lower rates globally may force the RBA to cut rates too, to avoid an appreciating AUD/USD. The pair has exhibited some signs of upward momentum lately. A hawkish RBA tomorrow will add fuel to this rally, while some jawboning of the currency could push it lower.
In general, Australian equities have benefited from looser monetary policy. The search for yield is on, as bond yields fall. Cheaper financial capital has also fostered a degree of risk-taking, with growth stocks in the IT and health care sensitive sector benefitting from lower risk-free rates. In addition, and more fundamentally, rates cuts have raised hopes for a turnaround in Australian consumption, with consumer stocks some of the best performing in the past six months. Though heavily driven by macro issues right now, the ASX200 ought to remain sensitive to changes in the RBA’s rhetoric. Investors will be seeking signs the RBA retains its dovish bias.
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