The August board meeting of the RBA is historically one of the four months of the year in which the likelihood of a rate change is highest. February, May, August and November happen to be the four months of the year in which previous rate changes have typically occurred.
As expected, the RBA announced Australia’s overnight cash rate would remain at 1.50%. ANZ senior economist Felicity Emmett said, “The tone of the statement remains broadly positive, with the Bank suggesting no material changes to its forecasts in the upcoming Statement on Monetary Policy due on Friday.”
Market reaction was limited on the day. Cash futures markets were less convinced of the likelihood of an upcoming rate rise and closing prices implied only a 20% chance of a rate rise within the next 12 months. In the bond market, Commonwealth Government yields slipped a couple of basis points across the curve. Yields on 3 year, 10 year and 20 year bonds all ended the day 2bps lower at 2.11%, 2.66% and 2.98% respectively. The local currency fluctuated around 73.95 US cents immediately after the decision but it did not really change until late in the afternoon when it moved up to 74.25 US cents.
Westpac chief economist Bill Evans has been critical of some parts of the RBA’s logic in recent months. After this latest policy meeting, he disagreed with the RBA’s forecast of “some lift in wages growth over time” given the RBA’s forecasts of the unemployment rate. He said the RBA’s expectations was inconsistent with the level of the unemployment rate required to produce wage pressures, which he estimates to be around 5%. “Our view, based on offshore evidence, is that the NAIRU in this cycle is likely to be below 5%, so even with this new lower unemployment forecast, it still seems a big call to expect sustained upward pressures on wages growth.”