- For the 11th month, the RBA kept the cash rate at 1.50%;
- The accompanying statement was broadly unchanged from last month;
- Markets are expecting the cash rate to remain unchanged for the remainder of this year;
- The Q2 CPI released on 26 July is the next key piece of domestic data.
‘Yes, and how many times can a man turn his head
And pretend that he just doesn’t see?
The answer, my friend, is blowin’ in the wind
The answer is blowin’ in the wind’
Blowin’ In the Wind
It is widely agreed that Bob Dylan has been one of the great musicians of the modern era. He has sold over 100 million records, is an academy award winner, a member of the Rock and Roll Hall of Fame and won a Nobel prize (for literature). He wrote many great songs, including Blowin in the Wind. According to Wikipedia, the song was ranked by Rolling Stone magazine as number 4 on their list of the 500 greatest songs of all time.
For financial markets, there are signs that the wind might be changing for the outlook for interest rates. In recent weeks US Federal Reserve officials have reiterated that they are likely to further increase interest rates this year, both the UK and Canadian central banks have talked the possibility of a cash rate rise, and the European Central Bank spoken about possibly reducing its quantitative easing program. All of this has been a change in tone by many of the key global central banks, has been a surprise to financial markets, and has started speculation about the potential for higher global interest rates. Much of the ‘real’ economy data (GDP, unemployment, retail sales) in many countries has been strong in the first half of this year. Whether higher interest rates end up happening will principally depend upon whether global inflation starts to rise. But there has been few signs so far of any sustained rise in inflation. There is also a question of whether financial markets are able to deal with a higher global structure of interest rates.
Given the global central bank news over recent weeks, there was speculation that the RBA might start to signal the possibility of a higher cash rate. In the event, the accompanying statement with today’s decision was broadly similar to last month’s. The immediate financial markets reaction was a fall in interest rates and the $A. The RBA could have taken the opportunity to upgrade its views of the labour market given the very strong jobs growth of the past three months. And they could have referenced the global central bank discussion of recent weeks. That they did not significantly change their Statement suggests that they are happy to sit back and take in more information (notably the Q2 CPI data on 26 July), and provide an update on their views next month (when the next quarterly instalment of the Statement of Monetary Policy is due to be released).
But there can be no doubt that the domestic economy is improving. A stronger global economy is clearly helping, boosting the tourism, education, mining and agricultural industries. Infrastructure spending is strong, notably in NSW. Business confidence is around 9-year highs, and is leading to an increase in business investment in the regions where the economy is doing best (NSW and Victoria). The improvement in commodity prices is helping to stabilize the regions that were doing it tough (such as WA and Central Queensland). There are concerns that the turn in the residential cycle will be a problem. This is something to be watched, but there is still plenty of work in the pipeline for home builders over the next 1-2 years (notably in the Eastern States).
The economy soft spot has been the consumer, weighed down by job worries, rising debt levels and low increases in take-home pay. The RBA referenced this in today’s Statement. Consumer confidence is below average, and spending in the shops has been modest. But strong business confidence is leading to better jobs growth. Today’s retail sales numbers suggest the consumer might be about to become a bigger boost to the economy. All up, developments in recent months should have provided the RBA with greater confidence that their forecast of a strengthening economy is on track.
The better domestic and international economic numbers over recent weeks has seen financial markets move to price out any chance of a rate cut this year. The next move in rates may well be up. But it is likely that the RBA would prefer to see the unemployment rate move sustainably below 5.5% before hiking rates. And at least as important driver of higher rates is a sustainable move higher in the underlying measures of inflation rate towards 2%. The rise of mortgage borrowing rates over recent weeks is doing some of the work of a higher cash rate. Ditto, the increase in the $A (although the shift higher in the currency has been partially offset by the rise in iron ore prices).
The improved economic outlook has seen a change in the view about the outlook for interest rates from analysts. At the start of the year when there was greater uncertainty about the economy, around 30% of analysts were expecting a rate cut by the RBA by the end of 2017. The latest Reuters survey now has very few analysts expecting lower rates, and just under half now expect a rate rise by Q3 2018.
The other interesting question is whether analysts will revise up their views on the outlook for the $A. While a lower $A has been the popular forecast, the June Reuters survey indicated that just under 40% of analysts expected the currency to be above 75c in 12 months. But the domestic data in particular has been stronger since the survey date, so there is the possibility of more analysts revising up their views of the $A. I still look for a lower currency given the risk that commodity prices will weaken because of stronger commodity supply. For the last year the $A has essentially traded within a 72-78c range. Clearer signs of weaker commodity prices will be necessary the for a break of the lower part of that range.
|Variable||Current (4 July 2017)||End Dec 2017||End June 2018|
|Cash rate||1.50%||1.50% (1.50%)||1.50% (1.50%)|
|AUD/USD||0.7668||0.74 (0.72)||0.74 (0.70)|
Figures are the median financial-market analyst forecast, sourced from the June 2017 Reuters survey. End-December forecasts are the 6-month forecast, while end June is the 12-month projection. The figures in brackets is the BoQ forecast.
Amazingly, Bob Dylan never had a number one song (although a few of his Albums did top the charts). But a number of his songs have stood the test of time, including ‘The Times They Are A-changin’. It is too early to say that the times for cash rate level are changin’. For that, we will need to watch developments in inflation, the unemployment rate and the global economy.
We live in interesting times.