The commentary today announcing the decision contained few surprises. The RBA still expects decent growth in Australia’s economy, falling unemployment, and modest rises in inflation and wages. The only rhetorical flourish of note was a mention that interest rates are rising in “a number of major advanced economies”. This follows the Bank of England’s decision last week to join the Federal Reserve and the Bank of Canada in hiking. There was also more detail on inflation, and an acknowledgement of increased competitive pressures, “especially in retailing”.
Reading between the lines, it seems there is a struggle going on at the RBA between competing demands. A case could be made that it should lower the cash rate to provide even more support to weaker parts of the economy, particularly the flagging consumer. On the flipside, though, officials would be concerned about growing financial stability risks associated with keeping the cash rate so low, for so long. The delicate balance between these competing arguments settles, for now, in the form of a steady cash rate.
Market pricing for the direction of interest rates (see chart) has moved materially in recent weeks. The futures market now implies that the first rate hike by the RBA will not come until April 2019 – previous pricing had implied a move almost a year earlier, by mid-next year. The low-ball Consumer Price Index (CPI) surprise released a few weeks back had much to do with this repricing, as did another shockingly weak retail sales report last week. Most market economists expect the RBA to be inactive on the policy rate for a lot longer yet.
These same economists will be looking for clues on the policy outlook when the RBA releases its updated economic forecasts on Friday, in its Statement on Monetary Policy (the SoMP). The downside surprise on inflation last month and a reweighting of the CPI basket probably mean a slightly lower inflation trajectory, but the Bank’s growth forecasts seem to be on track. For the first time, the RBA will publish central forecasts for Gross Domestic Product and the CPI, to the nearest quarter point, rather than the previous, more opaque, range of forecasts.