MNI POLICY: Markets Overplaying Impact Of Data Points On RBA
MNI looks at the RBA's likely reactions to data.
Reserve Bank of Australia officials think investors are overreacting to individual data points such as recent higher-than-expected inflation, with the RBA determined to rely on a more complete picture of the economy and prices before it adjusts its strategy and to respond with a steadier hand than the market expects, MNI understands.
While the Board may eventually need to reassess the expected path of inflation, it will not do so on the basis of individual reads, such as April’s CPI print of 3.6%, up 10 basis points y/y from March.
The market responded to the data and to the RBA’s May Statement on Monetary Policy forecasts with mixed pricing out until February 2025. Overnight index swaps have priced in a 32.5% chance of a cut at the next June 18 meeting, but a 39.1% hike probability at the subsequent Aug 6 decision.
The RBA board discussed hiking the cash rate at its May meeting but chose to hold it at 4.35%, despite stronger quarterly inflation. It pushed out its peak CPI call, yet maintained its timeline for returning inflation to target by mid-2025. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility)
Former staffers have told MNI the chances of a further hike without a significant inflation surprise are slim. (See MNI: Bar Remains High For Renewed RBA Hiking – Ex-Staffers)
OVERSEAS COUNTERPARTS
While the RBA assumes a flat exchange rate within its forecasts, it is watching closely any moves by the U.S. Federal Reserve and other central banks. Should those banks shift monetary policy, the Reserve will update its forecasts, but not before.
The Reserve uses a fixed exchange rate as predicting currency movements is too open to error. But its market-driven cash rate assumptions, which it began publishing this year, take forex and peer central bank moves into account. However, while interest rate differentials are important, the terms of trade act as a more significant anchor on the currency’s value and this is still broadly within the Bank’s models.
The Australian dollar has not driven significant concern among bank officials at present, relative to other channels of inflationary pressure.
CHINA OVERCAPACITY
The RBA also does not believe China is presently exporting goods-price deflation. Its assessment notes cyclical factors following the country’s reopening post pandemic have coincided with weak global demand, however, this has also happened to other exporting nations over the last two years.
Longer term, China's manufacturing base could experience overcapacity, particularly in electric vehicles, but this is more a strategic concern and out of the RBA’s remit.