Preview of the Reserve Bank of Australia monetary policy meeting on 3 February 2015 – most expect RBA on hold. Announcement due at 0330GMT.
We are on the home stretch leading up to the RBA announcement from their first meeting of 2015.
The current cash rate is at 2.5%
This meeting has gone from a big yawn at the end of last year, with the RBA pretty much expected to be on hold (again!) to being well and truly alive as the new year got under way, with a (very) vocal minority of press, economists, analysts and traders expecting a 25 basis point cut (some were calling for a January cut back in 2014, though, Westpac was a notable early mover amongst the big banks).
- According to the latest from Bloomberg, 22 of the 28 economists in the survey expect the RBA to remain on hold
- According to OIS pricing, though, the probability of a 25 basis point cut is 62%
The calls for a rate cut cite (in brief):
- RBA concerns over the unemployment level
- GDP is growing well below trend, its showing an annualized growth over the last 6 months of just 1.6%, and little sign of picking up
- Consumer and business confidence are both weak and not lifting
- Falling long (10 year) bond rates to around the cash rates indicate the OCR is too high
- Inflation is low and expected to remain towards the lower end as the oil price drop continues to feed through
- With other central banks cutting, aussie rates need to come down to avoid further flows into the currency
- China is weak and weakening
- Terms of trade continue to fall, reducing national income
The calls against a cut cite (in brief again):
- Inflation is not low, the trimmed mean is heading higher (see here and here)
- The falling Australian dollar argues for holding back on rate cuts to see its impact on both growth and inflation
- The falling Australian dollar is doing the job of stimulating the economy in place of rate cuts, and doing so without spurring on the heated property market further
- A cut would further ignite the property market
- In December the RBA said (again) “the most prudent course is likely to be a period of stability in interest rates” … they are likely to change the wording of their statement before moving on rates (many, but not all, of those saying no cut tomorrow concede the language will change to reflect an easing bias).
Also muddying the picture somewhat:
- There have been surprise announcements of interest rate cuts from, for example, the Indian and Singaporean central banks, both of which announced easings outside of regular meetings. Those saying the RBA will cut today point out that it would be a surprise to have them move without changing the language in their public statements first, but these are unusual times and call for unusual measures. My own view on this is that while it is something to be wary of the RBA is not other central banks, Glenn Stevens and the board are a very measured and deliberate, the Australian economy is by no means in need of emergency measures (like a rate cut ahead of changes to guidance), and the Australian dollar, while not falling rapidly enough for the central bank, is moving in the right direction.
- There have been numerous press articles, both from those who perhaps cry wolf a little too often, but also from those who write with more authority on the market. While each has formed the view that a cut is very probable, each has also allowed themselves some wriggle room by saying the bank may change its guidance only and leave a cut for later, likely March.
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So … what to expect?
My own view is no cut today, but it’s a close call (the market agrees, at 62% probability of a cut its close to evens).
Also, I think the language will change to be more dovish, that “prudent course is period of stability in rates” that we have seen for many, many months (most recently at the previous meeting back in December 2014) will be softened to provide an easing bias.
For the AUD, there may be a prospect of a rally as some shorts cover, there have been plenty of calls saying if the RBA doesn’t cut then the aussie $ will start gaining again … but I reckon the sellers will be waiting ahead of and around 0.8. To the downside, buyers are waiting at and just ahead of 0.77. I’ll be back with a closer look as we approach the decision time.
BTW – Adam has his preview, with many useful links in it, here: What you need to know ahead of the RBA decision
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As a ps. I may find a few pieces from around the place with views on today’s decision that I’ll post up. When reading views on the RBA decision newer traders should try to differentiate between:
- Those calling on the RBA to cut or not cut based on what the writer thinks the RBA SHOULD do … i.e. they would like to advise the RBA on policy. This is fine, but its not focusing on what they think the RBA WILL do, but are focused instead on getting their view on policy heard. Its interesting, but its not necessarily of much interest or usefulness to trading decisions,
- Book talkers. These are usually easy enough to spot, presenting usually just once side of the argument in emotional terms, deriding other points of view etc. Again, not necessarily of much interest or usefulness to trader decisions.
