The November 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 head of Australian Economics David Plank said, “While we don’t think the statement can be read as anything but more hawkish, the market’s assessment of the language actually dipped somewhat in terms of hawkishness.”
Market reactions were subdued on the day. Cash futures markets barely changed, although in a technical sense price movements implied a slightly lower likelihood of a rate rise in any given month. In the bond market, Commonwealth Government yields slipped a little across the curve. Yields on 3-year bonds remained unchanged at 2.15% while 10-year and 20-year bonds both ended the day 1bp lower at 2.74% and 3.10% respectively. The local currency moved a little higher during the afternoon and finished at 72.20 US cents.
The part of the RBA’s statement which stated “the central scenario is for inflation to be 2.25% in 2019 and a bit higher in the following year” caught Plank’s attention. He said, “This forecast return to 2.50% inflation comes a year earlier than we expected the Bank to project.”
Back in August, Philip Lowe gave a speech to the Anika Foundation. At that time he said, “If we had a forecast for inflation going above 2.50% then, at some point, we would be raising rates.” It would seem as if one more nudge upwards to the RBA’s forecasts would be enough to trigger the RBA into beginning the rate-raising cycle. Australia may be closer to rate rises than it thinks.
Westpac’s chief economist Bill Evans does not think so. “We expect that through 2019, the Bank will be surprised about the slowdown in the Australian economy and adjust its outlook accordingly. As such, we remain comfortable with our forecast that the cash rate will remain on hold in 2019 and, indeed, in 2020.”