It's here. After three months of intense speculation, the event Australian financial markets have been hanging out for has finally arrived.
The Reserve Bank of Australia’s (RBA) August interest rates decision is about to be released. After a momentary wobble following the release of last week’s Q2 Australian consumer price inflation (CPI) report, something that saw core CPI come in slightly ahead of expectations, both financial markets and economists continue to lean towards a further rate cut being delivered today, taking the cash rate to a fresh record-low of 1.50%.
While a rate cut is expected, it’s certainly not a done deal. This ensures that no matter what the RBA decides to do, the decision will be a show-stopper for financial markets.
Here's the state of play:
- Both economists and financial markets continue to favour a 25 basis point rate cut arriving this afternoon.
- 20 of 25 economists polled by Bloomberg expect that the cash rate will be reduced to 1.50%. Although a clear majority, 24 of 25 were forecasting a rate cut prior to the release of the Q2 CPI report. Four have changed their forecast.
- Like the economic community, financial markets are leaning towards a rate cut. Australian cash rate futures currently put the odds of a cut at a two in three chance. Looking further ahead, it is seen as a certainty that the cash rate will stand at 1.50% by November. In other words, another rate cut is already priced in.
- History is also on the side of those looking for a rate cut. Of the 29 rate movements that have occurred under Glenn Stevens’ tenure as RBA governor, 16 have directly followed a CPI report.
- While rates tend to move more frequently following an inflation report, August does not have a strong track record for heralding rate changes, particularly in recent years. In the past two decades rates have only moved five times in August, and only once since 2007.
- Whatever decision the RBA makes, be it to cut rates or hold them steady, the wording of the accompanying monetary policy statement will be equally as important as the rate decision itself.
- Should the RBA cut rates, it’s unlikely that it will insert a policy bias into the final paragraph of the statement.
- When the board last cut rates in May, it simply stated that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.
- However, should the RBA refrain from cutting rates, markets will be looking for an easing bias — suggesting that the path for rates is still likely to be lower — to be inserted into the final paragraph of the statement.
- Outside of the final paragraph, there’ll be plenty of interest on the outlook for inflation, labour market conditions — particularly labour market slack — the level of the Australian dollar and recent developments in the housing market.
- Given widespread expectations that a rate cut will be delivered, the risks heading into the event are for the opposite outcome to occur. A cut, whether now or in the months ahead, is seen as a certainty, suggesting it will have limited market impact should it actually be delivered.
- A non-move, on the other hand, will see the Australian dollar shoot higher and lead to a sell off in rates markets (yields higher). Stocks will likely slide, although banks may find support thanks to lesser margin pressures.
- Should the bank leave rates steady and not insert an explicit easing bias into the policy statement, it would come as a major shock to financial markets and lead to extreme levels of volatility.
Soon enough we’ll know exactly what the outcome will be. The RBA is scheduled to release its decision at 2.30pm AEST.
Business Insider will have full coverage as soon as the decision drops.
You can follow David Scutt on Twitter @David_Scutt. He will be covering the rates decision live.
This article was found on businessinsider.com.au, 2nd August 2016, and is written David Scutt. - See more at: http://www.businessinsider.com.au/rba-interest-rate-decision-preview-august-2016-8